Scarcity, Choice and Opportunity Cost: Question 4

Worked solution

Part (a): Identifying the normative statements

A positive statement is a claim about what is, or what would happen, that can in principle be tested against evidence. A normative statement contains a value judgement about what should or ought to happen, and cannot simply be proved true or false by evidence.

• Statement 2 is normative: it contains the word “should” and the value judgement that it is “unfair” for a full-time worker to earn below the poverty line. This is an opinion about what the government ought to do, not a testable claim.
• Statement 4 is normative: it contains the word “wrong” and expresses a view about what the government ought to prioritise, rather than describing a testable outcome.

Statements 1 and 3 are positive: each makes a specific, testable prediction (a rise in earnings for the lowest-paid 15%, and an 18% rise in wage costs) that could, in principle, be checked against real data once the policy takes effect. Neither uses language expressing what should happen.

Part (b): The ceteris paribus assumption

Ceteris paribus is Latin for “other things being equal.” Economists use it to isolate the effect of one variable on another by assuming that everything else relevant stays constant while that one relationship is examined.

Taking Statement 1 as the example: “raising the minimum wage to $12 per hour would increase the earnings of the lowest-paid 15% of workers, ceteris paribus” isolates the direct link between the wage rate and earnings. It assumes that other relevant factors, such as the number of hours the lowest-paid work and the number of people employed at the minimum wage, do not change as a result of the policy. This lets the adviser make a clear claim about the effect of the wage rise alone, without that claim being complicated by other changes that might be happening in the labour market at the same time.

Part (c): Why ceteris paribus might not hold

In reality, “other things” are unlikely to stay perfectly equal. One clear reason: employers facing a higher minimum wage may respond by cutting the number of hours they offer, or the number of low-paid staff they employ, in order to control their wage costs. If hours worked or employment among the lowest-paid fall as a result of the policy, then total earnings for this group would rise by less than Statement 1 predicts, and some individual workers could even see their earnings fall (if they lose hours or their job entirely), even though the hourly wage itself is higher.

Part (d): Government opportunity cost

The $3 million spent on enforcing the new minimum wage must come from the labour inspectorate’s fixed budget, so it cannot also be spent on anything else the inspectorate might have used it for. This is exactly what economists mean by opportunity cost: the value of the next best alternative given up. One concrete alternative use of the same $3 million would be spending it on additional workplace health-and-safety inspections instead of minimum-wage enforcement.

Final answers

• (a) Statements 2 and 4 are normative (they contain value judgements: “should”/“unfair” and “wrong”); Statements 1 and 3 are positive (testable predictions)
• (b) Ceteris paribus $=$ “other things being equal”: holding other relevant variables constant to isolate one effect
• (c) Employers may respond to higher wage costs by cutting hours or jobs for low-paid workers, so employment does not stay constant as assumed
• (d) The concept is opportunity cost; e.g. the $3 million could instead have funded additional workplace health-and-safety inspections