Question

A change in the relative price of one good versus another will cause a change in marginal product and the allocation of labor resources. When the price of good A increases relative to the price of good B and labor is mobile, the equilibrium real wage in industry A will:

Answer 1

Answer:

The correct answer is: increase relative to Industry B.

Explanation:

The marginal revenue product measures the conribution of each additional unit of input employed in the production process. It is calculated as the product of price of product and marginal product of input.

The profit maximizing level of wage is when the marginal revenue product of labor is equal to wages.

Suppose there are two goods, A and B respectively.

When the price of good A increases relative to good B, the marginal revenue product of labor employed in production of good B will increase as well.

This will cause the wage rate of those workers to increase in comparison to workers in industry B.