1. Consider the following three supply curves. Decide which one represents Smith
ID: 1139742 • Letter: 1
Question
1. Consider the following three supply curves. Decide which one represents Smith’s idea of how output evolves in the market for pins and explain why in the box next to the diagram
The long-run supply of labor is given by the line BFJ. In the absence of any taxes on or subsidies for unskilled labor, the equilibrium of the market will be at F. Suppose that the government now subsidizes wages in the amount FG. What will be the long run equilibrium amount of labor?
a. OD
b. DH
c. OH
d. DF
e. DG
Explanation / Answer
a) The second diagram represents the supply curve which gives a real idea of how the supply evolves. It shows the quantity supplied increase the price will also increase. The firm can't supply more without an increase in the price. The second graph represents the same.
b) "C"
OH will be the long run equilibrium amount of labor after subsidy.
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