If the relative price of one product rises and labor is
Mobile, then:
A)the percentage increase in the equilibrium real wage will be exactly the same as the percentage increase in
The relative price.
B)the percentage increase in the equilibrium real wage will be lower than the percentage increase in the relative
Price.
C)the percentage increase in the equilibrium real wage will be higher than the percentage increase in the
Relative price.
D)the equilibrium real wage will not change.

Question

Quizplus · Accepted Answer

If the relative price of one product rises and labor is mobile, the production of the now relatively more profitable good will expand, causing an increase in demand for labor in that sector. As a result, the equilibrium real wage will increase, but not by the same percentage as the increase in the relative price. This is because the increase in demand for labor will cause an increase in the price of labor, which will lead to increased costs for the firms producing the good. This will result in a decrease in supply and an increase in the price of the good, which will dampen the percentage increase in the equilibrium real wage.

If the Relative Price of One Product Rises and Labor