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QUESTION ONE

The wage rate of dairy workers rises

60 per cent of the cost of production is labour. Therefore, if the price of labour rises, the cost of production will raise and the firm will not be able to produce the same level of output at the previous level of cost. This implies that, if the firm decides to maintain the total cost, it will produce less output. A fall in output means that the firm will supply less to the market at the same market price (Nicholson & Snyder, 2012).

Higher wages will make production of low-fat milk expensive than before. Consequently, considering that firm operates under cost minimization, dairies will produce less low-fat milk and thus reduce market supply. Therefore, high wages will reduce the supply of low-fat milk.

S2

S1

 

P                                                                               

 

 

Y2                    Y1

 

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