Which statement best explains the market theory of wage determination?

• A. Wages are fixed by employers based on their profit goals.
• B. Wages are set solely by government regulations and minimum wage laws.
• C. Wages are determined by the average productivity of all workers in the economy.
• D. Wages are determined by the interaction of supply and demand for labor in the market.

Answer: (D)

Verified step by step guidance

1. Understand that the market theory of wage determination is based on the principles of supply and demand applied to the labor market.
2. Recognize that wages are not arbitrarily fixed by employers or solely set by government regulations; instead, they emerge from the interaction between how many workers are willing to work (labor supply) and how many workers employers want to hire (labor demand).
3. Recall that when the demand for labor increases relative to supply, wages tend to rise, and when the supply of labor exceeds demand, wages tend to fall.
4. Note that this theory assumes a competitive labor market where many employers and workers interact freely without significant restrictions.
5. Conclude that the best explanation for wage determination is that wages are set by the equilibrium point where labor supply equals labor demand, reflecting the market forces at work.