The market for engineers is initially in equilibrium. The demand curve for engineers shifts up. Assume the naive cobweb model holds such that in the first period, the labor supply is fixed, in the next period, wages are fixed, and so on. In period three, how will wages compare to its new long run level?

Question

Quizplus · Accepted Answer

In the short run, with a fixed labor supply, the increase in demand for engineers will lead to higher wages. However, in the next period, wages will be fixed and labor supply will adjust to the higher wages. As the supply of engineers increases, wages will eventually settle at a new equilibrium level. Since the question states that wages are initially at their long run level and then increase due to the demand shift, it is likely that the new equilibrium wage will be higher than the initial long run level. Therefore, in period three, wages will likely be below their new long run level, and so option A is the correct answer.

The Market for Engineers Is Initially in Equilibrium