For this question,assume expectations of P and A are correct.Now suppose that there is a 3% reduction in A.Given this information,which of the following will occur?
A)the PS relation will shift up by 2%.
B)the WS relation will shift down by less than 2%.
C)the WS relation will shift down by 2%.
D)there will be no change in the real wage.

Question

Quizplus · Accepted Answer

According to the question, expectations about P and A are correct. A reduction in A means that the cost of production has decreased, leading to an increase in supply. This will shift the WS curve down. The exact amount of the shift will be determined by the elasticity of labor supply, but it will be greater than 2% because the reduction in A is 3%. Therefore, choice C is the best answer.

For This Question,assume Expectations of P and a Are Correct