A firm negotiates a new labor contract with a higher average hourly wage. What is the most likely effect of the higher wage on the firm's price and output?
A) Neither price nor output will be affected.
B) Price will increase but output will not change.
C) Both price and output will increase.
D) Price will not change but output will decrease.
E) Price will increase and output will decrease.

Question

Quizplus · Accepted Answer

The cost of production for the firm will increase due to the higher hourly wage, which will lead to an increase in the price of the firm's product or service. However, the firm may not be able to pass on the full cost increase to customers, resulting in a decrease in output due to the lower profitability. Therefore, the most likely effect of the higher wage on the firm's price and output will be an increase in price and a decrease in output.

A Firm Negotiates a New Labor Contract with a Higher