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Suppose the government mandates that all companies over 50 employees must provide an increased level of...

Suppose the government mandates that all companies over 50 employees must provide an increased level of health care benefits. Please explain what effect this will have on the aggregate supply curve.

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Answer #1

The government mandate to the companies for providing increased health care benefits over 50 employess will result in increase in costs for the companies.The input prices will rise and some sellers may exit the market.

This will result in decrease in supply and the supply curve will shift to the left as a result as shown in the diagram below:

The supply will decrease from S to S1. T amount supplied at OP1 prices decreases from OQ1 to OQ2 as a result of shift from point E1 on supply curve S1 to point E2 on S2 curve. Decrease in supply may also mean that the same quantity OQ1 is supplied at higher price OP2. This is indicated by shift from point E1 on S1 curve to point B on S1 curve.

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