Multiple Choice
Which of the following correctly explains the effect of an increase in the marginal product of labor on the labor demand curve in a perfectly competitive market?
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15. Markets for the Factors of Production
Demand for Labor in Perfect Competition
Multiple Choice
In a perfectly competitive labor market, the demand for manufacturing jobs by firms is best described as which of the following?
A
A perfectly inelastic demand at the market wage because firms are wage takers
B
A derived demand that depends on the demand for the final goods manufactured and workers' marginal revenue product
C
An independent demand determined only by workers' preferences for employment
D
A demand determined solely by government minimum-wage policy and unrelated to output markets
Verified step by step guidance1
Understand that in a perfectly competitive labor market, firms are wage takers, meaning they accept the market wage as given and cannot influence it individually.
Recognize that the demand for labor by firms is not independent but is a derived demand, meaning it depends on the demand for the goods and services that labor helps produce.
Recall the concept of the marginal revenue product of labor (MRP), which is the additional revenue a firm earns from employing one more unit of labor. This is calculated as \(\text{MRP} = \text{Marginal Product of Labor} \times \text{Price of Output}\).
Understand that firms will hire workers up to the point where the wage equals the marginal revenue product of labor, because hiring beyond this point would cost more than the revenue generated.
Conclude that the demand for manufacturing jobs by firms is a derived demand that depends on the demand for the final goods manufactured and the workers' marginal revenue product, rather than being perfectly inelastic or independent of output markets.
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