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How much are fixed costs for this firm?  How do you know?

The firm has an approximated fixed cost of $210.00. To get fixed cost of a firm, we consider the cost of production at zero output. This is the cost that does not depend on output, and whether a firm produces output or not, it has to incur this cost.

  1. d) (5 pts) Which of the following market types could this firm be operating in (monopoly, oligopoly, monopolistic competition, or perfect competition)? How do you know?

To my understanding, this firm is closely operating in a perfect competitive market. In this market, firms in this market operate under cost minimization in order to compete with others in terms of market price, the higher the cost, the higher the price. Lower price increases demand for output thus boosting the competitiveness of a firm.

  1. e) (5 pts) What output level would this firm choose if the market price increased to $235.00? How do you know?

Given a market price of $235, the firm will produce 7 units of output. At this level of output, the firm will enjoy the maximum profit.

  1. f) (5 pts) What output level would this firm choose if the market price fell to $159.00? How do you know?

Considering that the market price adjusts downward to $159.00, the firm will be operating at a loss, at any level of output. In such a situation, the firm should produce 4 units; the level at which it will minimize loss relative to other levels of output.

  1. Optimal Output Level and Deviations from the Optimal Level – Price Floors


  1. b) (5 pts) A law is passed providing a minimum wage rate of $11 per hour. Draw this minimum wage of $11 per hour on the same graph. What happens to the quantity of labor demanded as a result of the minimum wage? What happens to the quantity of labor supplied as a result of the minimum wage?

Demand for labor is decreasing. As wages increases, the cost of production using labor input also increases, this makes production expensive and firm are less willing and able employ more workers. Moreover, as wages increase, more persons are willing to work, thus increase in labor supply.

  1. c) (5 pts) Is the minimum wage an example of a price floor or a price ceiling? Will the $11 per hour minimum wage cause a shortage or a surplus of labor?  Is this excess supply or excess demand for labor?

Minimum wage is a form of price floor, in labor pricing; this is the minimum value of a worker set by the government that a worker should be compensated for working. If the minimum wage is set at $11 an hour, there will be more workers willing to work than what the firms can hire; thus surplus in the labor market. Minimum wage will cause a surplus in labor because more people are willing to work for a higher wage.

  1. d) (15 pts) For each of the following, identify whether they are hurt or helped by the $11 per hour minimum wage and explain why you think they are helped or hurt:
  • An unemployed single mom taking her children to a fast food restaurant for lunch and filling out an employment application while she is there.

The minimum wage level will increase the cost of hiring for the single mom willing to applying for a job. The new wage will make more people seek employment, thus increased labor supply. As a result, the fast food restaurant will have to hire at a higher cost prompting it not to hire at all given the new wage levels. Thus single mum may not get the job due to increased minimum wage.

 Someone who worked 40 hours per week at $10 per hour and now works 20 hours per week at the $11 per hour minimum wage.

Total pretax income will be: 40 hours multiply by hourly wage of $10 giving a total earning of $400 per week. Given 20 hours a week multiply by $11 per hour, equals a total pretax earnings of $220. Perhaps the firm will have to reduce the working hours of the employee in order to maintain cost due to increased wages, given such consideration, the person will be made worse off by the minimum wage.

Someone who worked 40 hours per week at $7 per hour and now works 30 hours per week at the $11 per hour minimum wage.

In the first case, the individual earns $280. In the second case, the individual earns $330 and works less hours than before, thus the minimum wage has made the person better off.

  • A business owner of a fast food restaurant with 10 minimum wage employees.

In this case, the minimum wage negatively affects the business. Referring to the numbers presented and analyzing them, the business man will have to pay a dollar on top of what he had been paying each employee. This increases his cost, and thus lower revenue. Although in some cases, an increase in wages would motivate workers and thus increase productivity of the workers. However, this will also lead to increased output prices which will in turn lower the demand of output according to the law of demand.

  • A local family owned fast food restaurant with no paid employees. The only workers at this family owned fast food restaurant are mom, dad, their 17 year old daughter, and grandma who all work for free to help out.  

The set new minimum wage will have no impact on cost incurred by a local family-owned fast food restaurant for the restaurant utilizes the domestic labor thus it does not incur any costs on wages, adjustment of minimum wage upward by the government will have no effect whatsoever on them because, domestic labor does not earn wages but have mutual benefits such as growing the business and maximizing profits.

 (10 pts) What do you believe are the two most persuasive arguments in favor of the minimum wage?  What do you believe are the two most persuasive arguments against the minimum wage?

Two major arguments in favor of minimum wage are:

  1. Minimum wage leads to reduced poverty levels and increased societal welfare
  2. Minimum wage leads to increased consumption in the economy which interns leads to economic growth; as peoples income increases, their purchasing power also increases thus increasing overall demand in the economy which will lead to increased production by firms thus leading to economic growth. Increased demand means that government will also collect more revenue from taxes.

Two major arguments against minimum wages are:

  1. Minimum wage leads to decrease in labor demand. This results to reduced rate of employment as firms are no longer willing to employ and may even lay off workers to minimize costs.
  2. Increased wages results to high production costs; this may translate to high prices of output. As the cost of production increases also does the price of the output increase. The high cost of labor trickles down to output prices.

(5 pts)  How do you think an increase in the minimum wage to $11 per hour would impact you personally?

Personally, I would prefer an increase in minimum wage, for I will benefit from an increase.  My employer pays me the minimum age which does not meet all my needs, an increase in minimum wage means that my wages will also increase and thus I will have more to spend than what I have now. Increase will enable me finance my education without borrowing at interest. My employer is a banking institution and the possibility that it will lay me off is very minimal, thus I have no fear of losing my job but am sure an increase will tremendously help me.

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