Suppose the supply of labor is given by LS = 10w , where LS is the quantity of in millions of persons employed each year, and w is the wage rate in dollars per hour. The demand for labor is given by LD = 80 - 10w .
(a) What will be the free-market wage rate and employment level? Suppose the government sets a minimum wage of $5 per hour. How many people would then be employed?
(b) Suppose that instead of a minimum wage, the government pays a subsidy of $1 per hour for each employee. What will the total level of employment be now? What will the equilibrium wage rate be?