Chapter 14, Problem 1RQ

To determine

Elasticity of labor demand curve.

Explanation of Solution

The demand curve for labor is the marginal revenue product of labor which is measured by marginal product of labor multiplied by the marginal revenue.

In a competitive industry, since the price equals marginal revenue which is perfectly elastic, the demand curve for labor is marginal product of labor multiplied by price of the product.

The marginal revenue in a monopolist is downward sloping due to the law of diminishing returns. This implies as more labor is hired and output is produced, lower will be the price charged. As a result, the marginal revenue product of labor slopes downward and falls more quickly for the monopolist. Hence, the demand curve for labor (marginal revenue product curve) is steeper and more inelastic for a monopolist than for the competitive firm.

Economics Concept Introduction

Monopolist demand curve: The demand curve of the monopolist is a downward sloping market demand curve, so the price that the monopolist can get for each additional unit of output that must fall as the monopolist increases its output.

Marginal revenue curve: Marginal revenue curve shows the additional revenue that will be generated by increasing the product sales by one unit.

Marginal revenue product of labor: Marginal revenue product of labor is the change in firm’s revenue as a result of employing an extra unit of labor.