Question

The wage rate of workers in the wine industry in Country B has increased due to negotiations between the labour unions and the employers. Explain how this will affect the market for wine in Country B. Clearly indicate how the equilibrium price and equilibrium quantity of wine will change in Country B. The direction of any changes should be clearly indicated using arrows.

Answer 1

the wage rate of workers is a determinant of the supply of labor and the cost of production. An increase in the wage rate will have two effects on the market for wine:

• It will reduce the supply of labor, as workers will demand more leisure time as a normal good. This will shift the labor supply curve to the left.
• It will increase the cost of production for wine producers, as they will have to pay higher wages to their workers. This will shift the supply curve of wine to the left.

Both effects will reduce the equilibrium quantity of wine and increase the equilibrium price of wine in Country B. The direction of these changes can be shown using arrows:

Q* ↓ P* ↑