In the past, many employers agreed to pay employees medical benefits when they r

Question

In the past, many employers agreed to pay employees medical benefits when they retired in return for wage concessions. These retiree medical costs were paid as they occurred and were not funded, as would occur with a pension obligation. A new accounting rule required these firms to set aside funds to pay for these retiree benefits. These unfunded liabilities were huge. Did the firms raise their prices to pay off these liabilities, thereby hurting US competitiveness?

A. No, the firms deducted these retiree benefits from employees’ wages and thus did not have to raise prices.

B. Yes, to earn the funds to pay these unfunded liabilities, the firms had to raise their prices, thereby making US products more expensive than foreign-produced products.

C. No, the firms’ profit decreased as they had to pay these contracted liabilities as earned by their employees, and the value of the firms declined to account for this liability.

D. No, the government agreed to subsidize these liabilities so that the firms would not have to raise their prices and sell fewer products overseas.

Explanation / Answer

Solution: Yes, to earn the funds to pay these unfunded liabilities, the firms had to raise their prices, thereby making US products more expensive than foreign-produced products.

Explanation: This will be th only approach with which the the firms could compensate their marginal cost of production is by increasing the price of their goods and services

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