Question

The wage at which exactly the desired number of workers is employed is called the:

		market-wage price
		market-compensation price
		market-clearing price
		market-balance price

Answer 1

Answer is option (4)

we explain the reasons why there might be unemployment in the economy. Unemployment is a situation where people who are willing to work at or below prevailing wage rates cannot find employment. It is thus natural to begin by asking the question: What determines market wage rates?

A basic principle of economics is the notion that the price or value of anything, be it a commodity like bananas, an asset like money balances, or a resource like labour, is determined by the demand and supply for it. The supply and demand for labour in the production of a particular commodity is modeled in Figure 1. The supply curve is given by SS and the demand curve by DD. The horizontal axis gives the quantity of labour employed and the vertical axis the nominal wage per unit of labour under the assumption that the general price level is constant.

The demand for labour will be negatively sloped in all types of production for two reasons. First, a rise in the wage rate increases the costs of firms producing the commodity, forcing them to raise their selling prices. As the price of the product rises consumers will buy less of it and less output will be produced and sold. This means that less labour will be used. Second, since a rise in wages makes labour more expensive relative to capital, firms will substitute capital for labour. This means that less labour will be used to produce whatever output the firms in the industry sell.

If the wage is free to adjust in response to market forces it will move to We, where the demand for labour equals the supply. When the wage is above We, more labour will be presented for employment than firms in the industry can profitably hire. It will pay workers to lower their wages to obtain employment in the industry. And when the wage is below We, firms will find it profitable to hire more labour than is presenting itself for employment. They will offer a higher wage to obtain additional workers.