Question

Under what circumstances would a minimum wage be a nonbinding price floor? Under what circumstances would a living wage be a binding price floor?

Short answer

For the living wage price floor to be binding,it must be set above the equilibrium wage.

Step-by-step solution

Step 1. Introduction

A minimum wage is the lower limit or the price floor on the wage level paid to the workers in an economy. It is adopted by the government to protect workers from being exploited by employers.

Step 2. Explanation

A price floor implemented such as the minimum wage is not recognized as valid when the implemented price is lower than the equilibrium price. To be nonbinding, a minimum wage must be set below the equilibrium wage. The living wage-price floor must be set higher than the equilibrium wage to be legally binding.