As product markets become less competitive and the markup rises, we would expect which of the following to occur?Question 19Select one:a.a reduction in the interest rate in the medium runb.a reduction in the real wage in the medium runc.No change in output in the medium run.d.an increase in the aggregate price level as output increasese.No change in the real wage in the medium run.
Question
As product markets become less competitive and the markup rises, we would expect which of the following to occur?Question 19Select one:a.a reduction in the interest rate in the medium runb.a reduction in the real wage in the medium runc.No change in output in the medium run.d.an increase in the aggregate price level as output increasese.No change in the real wage in the medium run.
Solution
The correct answer is b. a reduction in the real wage in the medium run.
Here's why:
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When product markets become less competitive, firms gain more market power. This means they can increase their prices, which is referred to as a rise in the markup.
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As firms increase their prices, they make more profit per unit sold. However, to maintain these higher profits, they may look to reduce costs elsewhere.
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One significant cost for many firms is labor. Therefore, to maintain their increased profits, firms may choose to reduce real wages. This means workers are paid less in terms of what their wage can buy, even if their nominal wage (the actual amount of money they receive) stays the same.
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Therefore, as product markets become less competitive and the markup rises, we would expect a reduction in the real wage in the medium run.
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