A law increased the minimum wage by 30%. What is the minimum percent the owner must raise labor charges to balance higher expenses?

A law increased the minimum wage by 30%. What is the minimum percent the owner must raise labor charges to balance higher expenses?

• A. 60%
• B. 30%
• C. No increase is needed
• D. 15%

Answer: (B)

When costs rise, you can keep the same profit by increasing the price you charge customers by the same amount, assuming you can pass the full rise onto prices and demand doesn’t change. A 30% increase in the minimum wage means expenses go up by 30%. To balance those higher expenses, the owner would need to raise labor charges by 30% so revenue per unit matches the new cost level. Raising by more than 30% would overshoot and could reduce demand, while raising by less leaves profits smaller. So the minimum necessary increase is 30%.

When costs rise, you can keep the same profit by increasing the price you charge customers by the same amount, assuming you can pass the full rise onto prices and demand doesn’t change. A 30% increase in the minimum wage means expenses go up by 30%. To balance those higher expenses, the owner would need to raise labor charges by 30% so revenue per unit matches the new cost level. Raising by more than 30% would overshoot and could reduce demand, while raising by less leaves profits smaller. So the minimum necessary increase is 30%.