Chapter 28, Problem 28.1LO

To determine

Wage determination under perfect competition.

Explanation of Solution

Wage will be determined by the demand and supply of labour. Under perfect competition, the number of labour the firm will employ at which the wage rate will be exactly same as the marginal revenue product (MRP) of the labour.

The marginal revenue product (MRP) of a labour is equal to the revenue generated from the marginal product of the labor. It is the value of the product of marginal product of labor and the marginal revenue of the product. The point where MRP is equal to the wage rate will determine the amount of labour to be hired by the firm with the objective of profit maximization.

The marginal revenue product of labor is downward sloping.

As more and more labor is employed, the marginal productivity starts declining as per the law of diminishing returns. This leads to fall in the marginal revenue product as well. This MRP curve also depicts the demand curve for labor.

Economics Concept Introduction

Introduction:

Marginal revenue product: The marginal revenue product (MRP) of a labour is equal to the revenue generated from the marginal product of the labour.