Suppose that all workers receive a wage reduction.What would the impact on the market for autos be?
A)The supply of autos would decrease
B)The demand for autos would increase
C)The supply of autos would increase and the demand for autos would fall
D)Both a)and b)
E)It can not be determined

Question

Quizplus · Accepted Answer

If all workers receive a wage reduction, it means that their purchasing power also reduces. As a result, the demand for autos would fall since workers have less money to spend on purchasing a new vehicle. On the other hand, the supply of autos would increase because the production costs are reduced as labor costs fall. Thus, the automakers may increase the supply of autos to maintain their profit margins, resulting in a surplus. Therefore, the correct answer is C, i.e., the supply of autos would increase and the demand for autos would fall.

Suppose That All Workers Receive a Wage Reduction