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A perfectly competitive industry in long-run equilibrium comprises 200 identical firms. In one of the firms, the workers unionize and receive a 20% wage increase. What happens to the unionized firm in the short run and the long run

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Answer:

Short Run

This is a perfectly competitive industry which means that prices are the same for all the companies. The company that will increase its wages will therefore be unable to increase its prices to match.

This means that a situation might develop where average variable costs will be more than average revenue. At this point the company would have to shutdown operations.

Long Run

If the other companies in the industry have not seen the wages of their workers increase, it would mean that the prices would remain the same as they were which means that the company with the increased wages cannot come back into business and they will exit the market.

If on the other hand, other companies have unionized and improved wages, the market price in the industry will rise and the original unionized company can come back into business as they will now be able to afford to pay their workers.

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