What will happen in a perfectly competitive market if there is an increase in the cost of labour, ceteris paribus?
A) Firms will now make supernormal proﬁts that will attract new entrants to the market.
B) The short-run average total cost curve will shift upward reducing ﬁrms' proﬁts.
C) The supply curve will shift to the right reducing prices in the market further.
D) The average revenue curve will shift upward by the extent of the increase in labour costs.

Question

Quizplus · Accepted Answer

An increase in the cost of labour, holding other factors constant (ceteris paribus), will increase the production costs for firms. This leads to an upward shift in the short-run average total cost curve, which reduces the profit margins for existing firms in a perfectly competitive market.

What Will Happen in a Perfectly Competitive Market If There