Suppose that the market for labor is initially in equilibrium. An increase in the price of output will cause the equilibrium wage
A)and the equilibrium quantity of labor to rise.
B)and the equilibrium quantity of labor to fall.
C)to rise and the equilibrium quantity of labor to fall.
D)to fall and the equilibrium quantity of labor to rise.

Question

Quizplus · Accepted Answer

An increase in the price of output indicates an increase in demand for the output. This increase in demand leads to an increase in demand for labor, since more labor is needed to produce more output. As the demand for labor increases, the equilibrium wage rate for labor will also increase, as employers are willing to pay more to hire workers. At the same time, the equilibrium quantity of labor will also increase, as more workers are willing to supply their labor at the higher wage rate. Therefore, the correct answer is A.

Suppose That the Market for Labor Is Initially in Equilibrium