Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
By setting wages equal to the minimum wage in the industry
B
By analyzing the elasticity of labor supply to determine how sensitive workers are to wage changes
C
By offering the same wages as their competitors regardless of demand for their products
D
By ignoring wage differentials since they do not affect hiring decisions
Understanding the Answer
Let's break down why this is correct
Answer
In a competitive labor market, a firm aims to maximize profits by carefully setting the wage it offers to workers. To do this, the firm considers how sensitive the supply of labor is to changes in wages, known as the elasticity of labor supply. If the supply is elastic, a small increase in wage might attract many more workers, while inelastic supply means changes in wage won’t significantly impact the number of available workers. Additionally, the firm looks at wage differentials in similar industries to ensure it remains competitive; if other companies pay more for similar work, it might need to raise its wage to attract the best talent. For example, if a tech company pays $70,000 for software engineers but another firm in the same area offers $80,000, the first company may have to increase its wage to keep skilled workers from leaving.
Detailed Explanation
Firms look at how workers react to wage changes. Other options are incorrect because Some might think firms should just pay the minimum wage; It's a common mistake to think matching competitors' wages is enough.
Key Concepts
labor demand
elasticity of labor supply
wage differentials
Topic
Profit Maximization in Labor Markets
Difficulty
hard level question
Cognitive Level
understand
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