If firms must pay higher wages to workers, how does this affect supply?

Question

BlackTom AI · Accepted Answer

Higher wages increase firms' costs of production, which reduces the amount producers are willing to supply at any given price.

1. Relevant knowledge points and concepts
- Supply vs. quantity supplied: a change in supply means the entire supply curve shifts (producers supply more or less at every price). A change in quantity supplied is a movement along the supply curve in response to a price change.
- Costs of production (wages are an input cost): when input costs rise, marginal and average costs rise, lowering profitability at existing prices and causing firms to supply less at those prices.
- Graphically, an increase in input costs shifts the supply curve left (a decrease in supply).

2. Step-by-step reasoning
- Firms must now pay higher wages for the same labor input.
- Higher wages raise marginal cost (MC) and average cost (AC) of producing each unit.
- At any given market price, the profit per unit declines, so firms reduce the quantity they are willing to produce.
- The supply schedule at each price falls, which is represented as a leftward shift of the supply curve: supply decreases.

3. Intermediate steps (conceptual)
- Wages ↑ → Marginal cost ↑
- Marginal cost ↑ → Quantity supplied at price P decreases
- Quantity supplied decreases for all P → Supply curve shifts left → Supply decreases

4. Why the correct answer is correct
Option d explicitly links the cause (costs of production rise from higher wages) to the effect (supply will decrease). This matches the standard microeconomic result: higher input costs reduce supply.

5. Why the other options are incorrect
- a. "Supply will expand" is the opposite of the correct direction; expansion means supply increases.
- b. "Costs of production fall, so supply will increase" contradicts the premise (wages rise) and so is wrong.
- c. "Supply will contract" states the correct direction but is less specific about the causal mechanism; d provides the clear causal link (rising costs cause the decrease), which is why d is the best choice.

6. Conclusion
The correct answer is d. Costs of production rise, so supply will decrease. This matches the provided answer.

If firms must pay higher wages to workers, how does this affect supply?单项选择题

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