Question

Explain why this is false: An increase in the wage rate for labor used by a firm leads to higher costs and lower profit at the original quantity produced; the firm should respond by increasing its quantity produced so that its revenue will increase

Answer 1

The statement is false because wages are the variable cost for the firm. The more production is done the more labor is used and the variable cost increases decreasing the profit even further. In such a scenario, the firm will not increase its production only to increase its revenue but will stop at a point where its variable cost is more than its revenue i.e. the firm is starting to witness a loss.

In the given scenario a firm will respond by increasing the price of the product or decreasing the production to manage its input cost at the previous level.