FIGURE 14-6
-Refer to Figure 14-6. The market begins in equilibrium with the curves labelled Demand and Supply. If a labour union negotiates the wage to W2 in an otherwise competitive labour market,

Question

Quizplus · Accepted Answer

When the labour union negotiates the wage to W2, it means that the wage has increased from W1 to W2. As a result, some workers who were previously unwilling to work at W1 may now be willing to work at W2, resulting in an increase in the supply of labour. However, some workers who were willing to work at W1 may choose not to work now, resulting in a decrease in the supply of labour. Overall, the net effect on the supply of labour is likely to be small, so we can assume that the supply of labour will stay the same.
On the other hand, when the wage increases from W1 to W2, employers will find it more expensive to hire workers, and hence demand for labour will decrease. This means that the demand curve for labour will shift to the left, from the original curve labelled ‘Demand’ to the new curve labelled ‘D2’ in the figure. Since the demand for labour has decreased, employers will hire less labour, hence the quantity of labour hired will decrease from L1 to L2. Therefore, the correct answer is D, which states that employers will hire L1 quantity of labour. The other choices are incorrect because they either suggest that nothing changes (A), or the quantity of labour hired increases (B and E), which is incorrect given the decrease in demand for labour.

FIGURE 14-6 -Refer to Figure 14-6. the Market Begins in Equilibrium with Equilibrium