Suppose that firms are paying their "efficiency wage" rate and AD shifts leftward.Firms that lower wages and maintain production would
A)achieve lower profits since worker efficiency would fall and total wages paid increase.
B)achieve lower profits since worker efficiency would fall and wages per unit of output increase.
C)achieve higher profits.
D)achieve lower per unit wage costs.

Question

Quizplus · Accepted Answer

When firms pay an "efficiency wage" (a wage higher than the market-clearing level to increase productivity), reducing wages could decrease worker efficiency. This decrease in efficiency means that, even though nominal wages are lower, the wages paid per unit of output could increase because of reduced productivity, leading to lower profits.

Suppose That Firms Are Paying Their "Efficiency Wage" Rate and AD