Multiple choice

Directions: For this question, select the best of the answer choices given.

A discount retailer of basic household necessities employs thousands of people and pays most of them at the minimum wage rate. Yet following a federally mandated increase of the minimum wage rate that increased the retailer's operating costs considerably, the retailer's profits increased markedly. Which of the following, if true, most helps to resolve the apparent paradox?

  1. Over half of the retailer's operating costs consist of payroll expenditures; yet only a small percentage of those expenditures go to pay management salaries.

  2. The retailer's customer base is made up primarily of people who earn, or who depend on the earnings of others who earn, the minimum wage.

  3. The retailer's operating costs, other than wages, increased substantially after the increase in the minimum wage rate went into effect.

  4. When the increase in the minimum wage rate went into effect, the retailer also raised the wage rate for employees who had been earning just above minimum wage.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The paradox is that profits increased despite higher wage costs. Option B resolves this: the retailer's customers are primarily minimum wage earners. When their wages increased, their purchasing power rose, leading to more sales. This increased revenue outweighed the higher operating costs, resulting in greater overall profits.

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