As Wage Debate Rages, Some Have Made the Shift

This article in the WSJ reports the effects of local minimum wage laws that set the minimum above the national rate. The effects vary, some good - higher moral and better customer service - and some bad - closing stores, fewer hours, higher prices, from location and business type.

SUMMARY: In cities where local wages exceed the national minimum, the consequences are big and small, cutting across everything from the number of hours assigned to employees, to menu prices to food ingredients. The article cites a paper in Review of Economics and Statistics: "The reaction among San Jose employers [to an increase in the city's minimum wage] was largely in line with a study of 288 areas where the minimum wage differed across county borders. The research, published in the Review of Economics and Statistics in 2010, found municipalities with higher pay didn't suffer job losses among low-wage restaurant workers. Nearly half of all minimum wage-earners work in food service."

CLASSROOM APPLICATION: Students can examine the effect of an increased minimum wage on firm decisions. "The real-world impacts [of an increased minimum wage] can vary: Some companies had no difficulties passing along labor-cost increases while other businesses said they might close marginal stores to pare losses.... For businesses in San Jose, the results aren't entirely negative. Low-wage employers in the city have raised prices and trimmed costs, but some also report improved employee morale and better customer service."

QUESTIONS: 
1. (Introductory) What is the effect of an increase in the minimum wage on the supply of fast food? What is the effect of the change in supply on the price of fast food?

2. (Advanced) Suppose an increase in the minimum wage results in a $0.25 increase in the marginal cost of making a hamburger. How does the increase in the equilibrium price of hamburgers due to the increase in the minimum wage depend on the price elasticities of supply and demand?

3. (Advanced) Why are some fast food establishments increasing prices in response to increases in the minimum wage while others are cutting back on the number of employees? Why could each of these two responses possibly be profit-maximizing?

4. (Advanced) Is it possible that an increase in the minimum wage does not result in layoffs? Does the article offer good evidence that an increase in the minimum wage does not result the decreased demand for labor?