Workers at a local construction company are paid $32.50 per hour, and they have incorporated a 4 percent annual raise in their contracts to account for expected inflation
Explain how unexpected inflation of 2 percent will affect the real wages earned by these workers and the unemployment rate of these workers.
If actual inflation is 4%, a 4% increase in wages will allow workers to maintain their real wage. However, if inflation is lower than expected (2% instead of 4%), the 4% increase in wages will increase the real wage, and firms will hire fewer workers than they had planned. As a result, unemployment will rise.
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Rika's opportunity cost of producing 100 t-shirts is 50 jackets. Jeff's opportunity cost of producing 75 t-shirts is 25 jackets. Who should specialize in jackets?
A) Rika B) Jeff C) neither D) both E) More information is needed about their production possibilities frontiers to determine who should specialize in jackets.
What factors of production can a firm change in the short run? In the long run?
What will be an ideal response?