What occurs in the labor market when the prevailing wage (price) exceeds the equilibrium wage (price)?
a) Unemployment rises
b) A shortage occurs
c) A surplus arises
d) Unemployment falls
Demand and Supply of Labor in the Market:
The labor market works similarly to the commodity markets and is governed by the forces of demand and supply at the wage rate. As far as employment determination is concerned, there are two major theories, one being Classical theory of employment and the other being Keynesian theory of employment. Classical theory of employment is governed by laissez faire principles and completely depends upon the market forces. The classical economists believed that the market forces work in a manner which automatically restores the equilibrium conditions in the economy, at which point all workers are employed and there exists no involuntary unemployment. However, Keynes believed that wages and prices are sticky, which will not fully incorporate the changes in the economy to adjust to the equilibrium conditions; thus, the economy will experience underemployment.
Answer and Explanation: 1
When the prevailing wage rate exceeds the equilibrium wage rate: (A) Unemployment Rises
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fromChapter 7 / Lesson 9
Understand what sticky wages and sticky prices are. Comprehend wage rigidity. Discover why sticky wages and prices are important in Keynesian decision-making.