Solutions: Case Study – Automation in Fast Food
1. A supply and demand curve for the fast food labour market is presented below, label the equilibrium price and quantity.
Since Firms demand the labour, they represent the demand side of the market.
Since Job Searchers supply the labour, they represent the supply side of the market.
The equilibrium occurs at the intersection of supply and demand, in this case @ EP = $10/hr, EQ = 4.8 million workers employed.
2. What is consumer and producer surplus? Market surplus?
Consumer Surplus
It is important to understand that firms are the consumers in this situation since they demand and ‘consume’ labour. Recall consumer surplus is the difference between willingness to pay and the wage they pay paid. This is equal to the area labelled CS represented by the blue triangle in the figure above.
[latex]\frac{\left(20-10\right)\times \left(4.8\right)}{2}[/latex] = $24 million
Producer Surplus
In this contexts the producers are the job searchers/workers since they ‘produce’ labour for the firms to buy. Producer surplus is the difference between the marginal cost of labour (commuting, opportunity cost, etc) and the wage.
[latex]\frac{\left(10-0\right)\times \left(4.8\right)}{2}[/latex] = $24 million
Market Surplus
Market surplus is just consumer surplus + producer surplus.
$24 million + $24 million = $48 million
3. Assume the government passes policy introducing a $15 minimum wage. Label the new quantity demanded, and quantity supplied. Is there a shortage or a surplus of labour?
A minimum wage is the same as a price floor, a government policy that restricts price from falling below the mandated level. In this case price is wage. At a wage of $15/hour quantity of labour demanded = 2.4 million, whereas quantity of labour supplied = 7.2 million. The resulting unemployment represents a surplus of workers in the market.
4. What are the two effects of the minimum wage on workers? What is the net change in surplus?
When you have a price change from equilibrium two things happen – a transfer and a deadweight loss. In this example the two mean very different things for consumers.
The transfer
There are clear benefits for the minimum wage if you keep your job. For the 2.4 million workers in this situation who go from receiving a wage of $10/hour to $15/hour, their surplus increases. This increase is represented by the highlighted red region labelled +PS.
($15-$10)*(2.4) = +$12 million
The deadweight loss
The workers who lose their jobs from the policy are less happy. In this case 2.4 million workers are now unable to find work. Note that these are the workers who faced the highest marginal cost of labour, the decrease in surplus is represented by the grey region labelled -PS.
[latex]\frac{\left(10-5\right)\times \left(2.4\right)}{2}[/latex] = -$6 million.
The net change in surplus for workers is +$6 million ($12 million – $6 million)
5. What is the deadweight loss from this policy?
Even though workers gain from the policy,