Economy-wide wage rise shifts supply left, changing equilibrium quantity

Steps:

• Examine each option for impacts on demand (income, substitutes) and supply (costs, wages).
• Rising real wages raise production costs across sectors, shifting supply curve leftward.
• Leftward supply shift raises price and lowers equilibrium quantity from Q1.
• Compare to diagram: this matches the observed change in Q1.

Why B is correct:

• Per the law of supply, higher input costs (wages) decrease quantity supplied at each price, shifting supply left and reducing equilibrium Q.

Why the others are wrong:

• A: Fall in incomes shifts demand left (lowers Q); higher interest rates shift supply left (lowers Q)—causes Q decrease but via demand shift, not pure supply.
• C: Higher substitute price shifts demand right (raises Q); lower production costs shift supply right (raises Q)—increases Q, opposite of diagram.
• D: Higher substitute price shifts demand right (raises Q); lower production costs shift supply right (raises Q)—increases Q, opposite of diagram.

Final answer: B