Within the perfectly competitive market structure, consider a labor union that manages to obtain higher wages for its members. At the time the union obtains higher wages, the perfectly competitive firms are earning positive economic profits. It follows that
A)initially higher wages will reduce profits.
B)in the long run product prices will be higher because of higher wages.
C)in the long run the firms in the industry will earn below normal profits.
D)in the short run the firms in the industry will necessarily earn below normal profits.
E)a and b

Question

Quizplus · Accepted Answer

A) Higher wages increase the cost of production, which reduces profits if prices remain constant. B) In the long run, firms will adjust their prices upwards to cover the increased costs, including higher wages, to maintain normal profits in a perfectly competitive market.

Within the Perfectly Competitive Market Structure, Consider a Labor Union