Question

Suppose that dehydrated meat is an inferior good. Discuss the effect on the equilibrium wage rate and level of employment in the dehydrated meat industry of an increase in national income.

Short answer

An increase in national income would decrease the demand for dehydrated meat, an inferior good. Consequently, this would lead to a decrease in the equilibrium wage rate and increase the level of unemployment in the dehydrated meat industry.

Step-by-step solution

Infer the change in demand

Following the characteristics of an inferior good, when national income increases, the demand for dehydrated meat, being an inferior good, decreases. This is because consumers can now afford to buy better, normal or luxury goods, lessening their demand for dehydrated meat.

Determine the effect on wage rate and employment level

When demand decreases, producers will scale down production to avoid losses. This would lead to an excess of workers in the dehydrated meat industry. As a result, to cut down costs, employers will likely reduce the wage rates. A surplus of labour coupled with decreased wage rates will lead to unemployment.

Summarize the overall effect

In conclusion, with the increase in national income, the dehydrated meat industry will face a fall in demand which drives down the equilibrium wage rate and increases the unemployment level within the industry.