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

When the relative price of a product rises, it typically leads to an increase in demand for labor in the industry producing that product. However, as labor moves to that industry from others, the supply of labor increases, which tends to moderate the increase in the real wage. Therefore, the percentage increase in the equilibrium real wage is generally lower than the percentage increase in the relative price.

If the Relative Price of One Product Rises and Labor