Multiple Choice
Which of the following will cause a decrease in the demand for labor?
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15. Markets for the Factors of Production
Shifts in Labor Demand
Multiple Choice
Which of the following will result in an increase in labor demand?
A
A decrease in the productivity of workers
B
A decrease in the demand for the final good
C
An increase in the wage rate
D
An increase in the price of the product produced by labor
Verified step by step guidance1
Understand that labor demand is derived from the demand for the final product that labor helps produce. This means changes in factors affecting the product's price or demand will influence labor demand.
Recall that labor demand depends on the marginal revenue product of labor (MRP), which is calculated as \(\text{MRP} = \text{Marginal Product of Labor} \times \text{Price of the Product}\).
Analyze how each option affects the MRP: a decrease in worker productivity lowers the marginal product, reducing labor demand; a decrease in demand for the final good lowers the product price or quantity demanded, reducing labor demand; an increase in the wage rate affects the cost of labor but does not directly increase labor demand.
Focus on the effect of an increase in the price of the product produced by labor: since MRP is the product of marginal product and product price, an increase in product price raises MRP, making labor more valuable to firms and increasing labor demand.
Conclude that among the options, only an increase in the price of the product produced by labor leads to an increase in labor demand because it raises the marginal revenue product of labor.
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