If ﬁrms are paying eﬃciency wages, they
A) may be reluctant to increase nominal wages when aggregate demand increases.
B) are highly vulnerable to import competition.
C) may be targeted for takeover by ﬁrms paying market wages.
D) may be reluctant to cut wages when aggregate demand declines.

Question

Quizplus · Accepted Answer

If firms are paying efficiency wages, they may be reluctant to cut wages when aggregate demand declines to maintain employee morale and productivity. This can lead to higher labor costs and lower profits for the firm, but it also means that workers are less likely to leave for other jobs with lower wages during a downturn.

If ﬁRms Are Paying Eﬃciency Wages, They