Question

5. (8 marks) Wh wage equals the value of marginal product? Why is the short run demand curve for labour downward sloping? y does a profit maximizing firm hire workers up to the point where the

Answer 1

1) In economics, the marginal revenue productivity theory states that a profit maximizing firm will hire workers up to the point where the wage rate equals the value of marginal product because it is inefficient for a firm to pay its workers more than it will earn in revenues from their labor. When marginal product is greater than the real wage, the value of the marginal product will exceed the cost of employing an additional worker (the real wage); profits will rise if the worker is hired. On contrary, when the marginal product is less than the real wage, the value of the marginal product will be lesser than the cost of employing an additional worker (the real wage); profits will rises if the worker is laid off. Thus at the point where marginal revenue product is equal to the wage rate, profits are maximized.

2) The short run demand curve for labor is downward sloping because of the law of diminishing marginal product. The law of diminishing marginal product describes that when firm uses more of a variable resource with a fixed technology and fixed resource, the marginal product of the variable resource will decline.