In a model of the labor market, an equilibrium is reached where two conditions are met simultaneously: 1) firms pay a real wage consistent with their profit-maximizing price, and 2) the real wage is just high enough to motivate employees to work effectively, given the level of unemployment. At this equilibrium, neither firms nor workers have an incentive to unilaterally change their behavior. Now, consider a situation where the level of employment is below this equilibrium. In this scenario, the wage required to motivate workers is lower than the wage firms are actually paying. What is the most likely consequence of this disequilibrium?

Incentives at Labor Market Equilibrium

Firm's Wage-Setting Decision at Equilibrium

In a labor market model, the wage-setting curve (which shows the real wage needed to motivate workers at each level of employment) is upward-sloping, while the price-setting curve (which shows the real wage paid when firms choose their profit-maximizing price) is horizontal. The intersection of these two curves determines the equilibrium level of employment. Suppose the economy is operating at a level of employment above this equilibrium. Which of the following statements accurately describes this situation and its likely consequence?

Consider a labor market in a stable equilibrium where the real wage paid by firms is precisely the amount required to motivate employees to exert adequate effort. In this situation, a typical profit-maximizing firm could increase its profits by unilaterally lowering the wage it offers.

In a labor market model, an equilibrium is established at the intersection of the upward-sloping wage-setting curve and the horizontal price-setting curve. At this point, the real wage is sufficient to motivate workers, and firms are setting prices to maximize profits. Given this equilibrium state, which of the following claims made by an economic agent is inconsistent with the conditions of this equilibrium?

The Stability of Labor Market Equilibrium

In a model of the labor market, an equilibrium is established where the wage-setting and price-setting curves intersect. This point is a 'Nash equilibrium,' meaning no individual agent can improve their outcome by unilaterally changing their strategy. Match each economic agent or entity with the statement that accurately describes their condition at this equilibrium.

Analysis of Nash Equilibrium in the Labor Market

Evaluating a Firm's Wage Strategy at Labor Market Equilibrium