Lets assume that the minimum wage in a certain area is $7.00 and let's assume that the lowest wage that businesses pay workers in this free market is $9.00 (assume that this is the going market wage that all businesses pay for unskilled, minimum wage workers). Given these conditions, and assuming no other changes in the economy, what does the theory of demand and supply predicts regarding what will happen to unemployment if the minimum wage is raised from $7.00 to $10.00?

group of choices

Unemployment will rise because minimum wage workers will see an increase in their hourly wage and the quantity demanded for labor will decrease.

Unemployment will fall because minimum wage earnings will decline and the quantity demanded for labor will increase.

Unemployment will be unaffected because people are already earning above the minimum wage at the new minimum wage.

Unemployment will rise in the short run, but fall in the long run because the government-established wage will fall in the long run.