Exhibit 4-3 Supply and demand curves

-The market shown in Exhibit 4-3 is initially in equilibrium at point E₄.Union negotiations result in a wage increase.Other things being equal,which of the following is the new equilibrium after this wage increase is in effect?

Question

Exhibit 4-3 Supply and demand curves
 
-The market shown in Exhibit 4-3 is initially in equilibrium at point E₄.Union negotiations result in a wage increase.Other things being equal,which of the following is the new equilibrium after this wage increase is in effect?

Quizplus · Accepted Answer

With the wage increase, the production cost of the suppliers increases, shifting the supply curve to the left from S₀ to S₁. At the same time, the purchasing power of consumers increases, shifting the demand curve to the right from D₀ to D₁. As a result, the new equilibrium point is E₃, where the quantity demanded and supplied are equal at a higher price than the initial equilibrium point. Thus, the correct answer is option C, E₃.

Exhibit 4-3 Supply and Demand Curves