A minimum wage law is established in a competitive market, and it raises wages from the equilibrium
Question:
A minimum wage law is established in a competitive market, and it raises wages from the equilibrium wage of $12 to the new minimum wage of $15. What is the best description of how this affects the competitive labor market?
Group of answer choices
Competitive firms will set the wage equal to the marginal product of labor. Since the wage has increased, and marginal product of labor is declining as the firm employs more workers, employment will decrease.
Competitive firms will set the wage equal to the marginal revenue product of labor. Since the wage has increased, marginal revenue product of labor will go up, encouraging additional employment.
Competitive firms will set the wage equal to the marginal revenue product of labor. Since the wage has increased, and marginal revenue product of labor is declining as the firm employs more workers, employment will decrease.
Competitive firms want to set the wage equal to the marginal revenue product of labor, but with the new law this is no longer possible. Employment will not change, but firms will lose money.
Competitive firms will set the wage equal to the marginal revenue product of labor, but since the net effect of the law on the marginal revenue product of labor is ambiguous, it is unclear whether the minimum wage will affect employment.