A firm negotiates a new labor contract with a higher average hourly wage.What is the most likely effect of the higher wage on the firm's price and output?
A)Both price and output will not be affected.
B)Price will increase but output will not change.
C)Both price and output will increase.
D)Price will not change but output will decrease.
E)Price will increase but output will decrease.

Question

Quizplus · Accepted Answer

With a higher average hourly wage, the firm's production costs will increase. This will lead to an increase in the price of the product. However, in order to maintain profitability, the firm may decrease its output to reduce costs. Therefore, the most likely effect of a higher wage is an increase in price and a decrease in output.

A Firm Negotiates a New Labor Contract with a Higher