Question

Assume good is produced in a competitive output market that is in long-run equilibrium. in the short run, the variable input is unskilled labor whose wage is determined in a competitive labor market. suppose there is an increase in consumer demand for good . which of the following explains the resulting change in the labor market for unskilled workers in the short run?

A. new firms will enter using more labor and more capital to produce good z , lowering the price of good z .
B. with more output of good produced, the supply of labor needed to produce good increases, and the wage rate for unskilled workers will fall.
C. the price of good z increases and the labor demand curve shifts to the right along the existing labor supply curve, resulting in higher wages and employment of unskilled workers.
D. since the market is in long-run equilibrium, economic profits are zero, and therefore the demand for labor remains unchanged.
E. the marginal factor cost of labor will decrease, leading to more unskilled workers being hired.

Answer 1

An increase in consumer demand for a good results in a rise in the product's price, making production more profitable. This profitability leads to a rightward shift in the labor demand curve, increasing both wages and employment of unskilled workers.

Step-by-step explanation:

When there is an increase in consumer demand for a good in a competitive market, the price of the good tends to rise. This increase in the product's price makes production more profitable, incentivizing suppliers to expand production. Given that unskilled labor is a variable input in this scenario, suppliers seek to hire more unskilled workers to meet the increased production demands. This leads to a rightward shift in the labor demand curve, which occurs along the existing labor supply curve.

The direct impact of this shift is a rise in both the wages and the employment of unskilled workers in the short run. It's important to note that the marginal factor cost of labor, or the additional cost to the firm of hiring one more unit of labor, typically increases in such a scenario, rather than decreasing, contradicting option E. The rightward shift in labor demand results from higher profitability due to increased product prices and not because labor itself has become less expensive.