In a labour market, the demand for labour is L = 600 - 20w and the supply of labour is L = 40w - 300, where L is hours of work and w is the wage in rupees. If the government sets a minimum wage of Rs 20, what are the equilibrium wage without it and the effect of the minimum wage?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Equilibrium wage Rs 15; excess supply of 300 hours
Given:
Demand for labour: L = 600 − 20w
Supply of labour: L = 40w − 300
Minimum wage = Rs 20
Equilibrium wage is where labour demand equals labour supply. A minimum wage above it works like a price floor: more labour is offered than firms want, which is excess supply.
\( 600 - 20w = 40w - 300 \)
\( 60w = 900 \)
\( w = 15 \)
At w = 15, L = 300 hours.
At the minimum wage of Rs 20:
\( \text{Demand} = 600 - 400 = 200 \)
\( \text{Supply} = 800 - 300 = 500 \)
\( \displaystyle \text{Excess supply} = 500 - 200 = 300 \text{ hours} \)
The equilibrium wage is Rs 15, and the minimum wage leaves an excess supply of 300 hours.
Excess supply and the fall in employment are different. Excess supply is the gap between hours offered and hours demanded (500 − 200 = 300). The fall in employment is 300 − 200 = 100 hours, which Option (3) gives.
NCERT (2026-27): “5.2.2 Price Floor … Most well-known examples of imposition of price floor are agricultural price support programmes and the minimum wage legislation. Through an agricultural price support programme, the government imposes a lower limit on the purchase price for some of the agricultural goods and the floor is normally set at a level higher than the market-determined price for these goods. Similarly, through the minimum wage legislation, the government ensures that the wage rate of the labourers does not fall below a particular level and here again the minimum wage rate is set above the equilibrium wage rate.” “… But when the government imposes a floor higher than the equilibrium price at pf , the market demand is qf whereas the firms want to supply q′f, thereby leading to an excess supply in the market equal to qf q′f . …” |