Suppose the government decides, in the interest of "fairness", to impose a policy prohibiting factor- price differentials. The likely result would be
A) a horizontal factor supply curve.
B) a decrease in net factor demands.
C) a shortage of factors in uses with low net advantage.
D) equilibrium in factor markets.
E) an increase in factor mobility.

Question

Quizplus · Accepted Answer

Prohibiting factor-price differentials means that all factors of production are paid the same wage or rental rate regardless of their productivity or scarcity. This leads to a situation where some of the factors of production are overpaid while others are underpaid. The net effect of this policy is that factors of production, which are overpaid, will be in excessive supply while factors, which are underpaid, will be in short supply. Thus, there will be a shortage of factors in uses with low net advantage.

Suppose the Government Decides, in the Interest of "Fairness", to Impose