Suppose the labour supply function is L^S= 20w and the labour demand function is L^D= -10w + 450 , where w is hourly wage rate in dollars and L^S and L^D denote respectively labour supply and demand in terms of ten thousand people. Suppose the government decides to impose a minimum wage of $20 per hour. Suppose the competitive market equilibrium was Pareto efficient before the imposition of the minimum wage.

a) Define the compensating variation for all the employers together in this case. (7 marks)

b) Draw the labour supply and demand curve and indicate the compensation area. (Note: draw on a piece of paper and submit it via LMS at the end of the test.) (7 marks)

c) Calculate the compensating variation. (Note: you need to show your calculations.) (7 marks)