Marks: 1 Suppose a perfectly competitive firm, which is initially in long-run eq

Question

Marks: 1 Suppose a perfectly competitive firm, which is initially in long-run equilibrium experiences a decrease in the wages it must pay its employees. In the short run, which of the following will occur?
Choose one answer. a. ATC will shift up and MC will shift down, causing the firm to incur a loss.
b. ATC and MC will shift down, causing the firm to earn a positive economic profit.
c. ATC and MC will shift up, causing the firm to incur a loss.
d. ATC will shift down and MC will shift up, causing the firm to earn a positive economic profit.

Explanation / Answer

A wage is a marginal cost of labor. The MC curve will shift down. The ATC curve will shift down since wages are a variable cost. Th firm will earn an economic profit because the price will be above the average total cost until new firms enter the market and drive down the firm's demand. B is the correct answer.

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