Question16 If the minimum wage is set above the equilibrium market wage, it is lower than firms are willing to pay for labor. is effective and reduces unemployment. does not affect the market equilibrium. equals the black market wage. increases unemployment. ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

The question asks about the outcome when the minimum wage is set above the market-clearing (equilibrium) wage. Let's evaluate each option in turn, explaining why it is or isn’t true in standard labor market theory.

Option 1: "is lower than firms are willing to pay for labor." If the minimum wage is set above the equilibrium, it cannot be lower than what firms are willing to pay; in fact, it would be higher than the equilibrium wage. Therefore this statement mischaracterizes the effect and is incorrect.

Option 2: "is effective and reduces unemployment." When a minimum wage exceeds the market-clearing wage, it typically leads to a surplus of labor—unemployment among workers who cannot find jobs at the higher wage—because the quantity of labor supplied rises while the quantity demanded by firms falls. Thus, this option is generally false in standard models.

Option 3: "does not affect the market equilibrium." The conventional result in wage-setting models is that a binding minimum wage (above equilibrium) does alter the labor market by creating unemployment and a gap between labor supplied and labor demanded. Therefore this statement is incorrect.

Option 4: "equals the black market wage." The black market wage could be lower than the legal minimum or differ due to illicit labor arrangements, but it is not defined as equal to the minimum wage set above equilibrium. Equating the two is not a standard or necessary outcome, so this is not correct.

Option 5: "increases unemployment." This aligns with the standard result: a binding minimum wage above the equilibrium wage tends to raise unemployment by reducing the quantity of labor demanded while increasing the quantity of labor supplied, creating unemployment for workers who cannot find jobs at the higher wage. Hence this option correctly captures the typical effect.

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