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Assume that the market equilibrium wage for unskilled labor is $5. The government passes a minimum wage law which sets the minimum wage at $5. Assuming that the unskilled labor market is perfectly competitive and using the tools of supply and demand, what should be the result of this law? (Assume that there are no other changes in the labor market.)
1. The law would not be binding; there would be no effect on the unskilled labor market.
2. The law would be binding and would cause a labor shortage, i.e. unemployment, in the unskilled labor market.
3. The law would be binding and would cause a labor surplus, i.e. unemployment, in the unskilled labor market.
4. The law would affect the entire labor market and would cause a shortage of both the skilled and unskilled workers.
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