If firms must pay higher wages to workers, how does this affect supply?

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BlackTom AI · Accepted Answer

Framing the question: we’re looking at how higher wages affect the supply decision of firms, holding other things constant.
Option a: 'Costs of production rise, so supply will decrease' — This directly ties higher wages to a higher cost of producing each unit. When input costs rise, the firm's willingness and ability to produce at every price falls, which reduces the quantity supplied. This explains the standard positive relationship between costs and the price-adjusted supply response, so this option correctly states the effect.
Option b: 'Supply will contract' — At first glance this seems correct since contracting supply means a reduction in quantity supplied. However, it’s less precise because it doesn’t explicitly attribute the contraction to higher wages or higher production costs. It describes the outcome without the mechanism, making it a weaker, less informative choice.
Option c: 'Supply will expand' — This contradicts the basic economic intuition. Higher wages raise costs, not reduce them, so expansion of supply is incorrect in this context.
Option d: 'Costs of production fall, so supply will increase' — This reverses the premise. Since the premise is higher wages, costs do not fall; they rise. Therefore this option misstates both the cost impact and the supply response.
Additional note: In typical microeconomics analysis, the supply curve shifts left (decreases) when production costs rise (like higher wages), because producers supply less at each price. This aligns with option a as the mechanism rather than merely restating the outcome without cause (as in option b).

MUF0061 Economics Unit 1 - Semester 2, 2025 Supply - Video and Quiz

If firms must pay higher wages to workers, how does this affect supply?

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