In several industrialized countries, the wages of low-skilled workers have fallen in recent years.

In one country, two broad proposals have been put forth to improve low-skilled workers' pay: a

minimum wage, and a wage subsidy. Employers' demand for low-skilled workers (in millions of

worker-hours) is:

100 5 D D Q = w

where wD is the wage paid by employers in dollars per hour. The supply of low-skilled labor (in

millions of worker-hours) is:

30 2 S S Q = + w

where wS is the wage received by workers in dollars per hour.

(a) What is the market wage and level of employment among low-skilled workers in this

country, with no government intervention?

(b) The proposed minimum wage plan would set the wage at $15/hour. Opponents claim

that the policy will induce unemployment. Unemployment is defined by hours that

workers are willing to provide at a given wage, but firms will not want to purchase.

i. How much unemployment (in worker-hours) will be induced, if any, as a result of

the $15/hour minimum wage?

ii. What is the gain in producer (workers') surplus for those still employed?

(c) Under the competing proposal, the wage subsidy plan, the government will provide a

$7/hour subsidy to employers who hire low-skilled workers.

i. What would be the new wage received by workers under the subsidy plan?

ii. What wage will employers pay?

iii. What will be the induced unemployment, if any, in worker-hours?

iv. What will be the cost to government?