Multiple Choice
When economists say that the demand for labor is a derived demand, they mean that it is:
2
views
15. Markets for the Factors of Production
Demand for Labor in Perfect Competition
Multiple Choice
What determines the demand for labor?
A
The market supply of labor and workers' preferences
B
The firm's total output level regardless of productivity
C
The nominal wage rate paid to workers
D
The marginal revenue product of labor (MRP = marginal product of labor × output price)
Verified step by step guidance1
Understand that the demand for labor by a firm is derived from the value of the additional output produced by one more unit of labor, which is called the Marginal Revenue Product of Labor (MRP).
Recall the formula for MRP: \(\text{MRP} = \text{Marginal Product of Labor (MPL)} \times \text{Price of Output}\), where MPL is the additional output produced by an extra worker.
Recognize that firms will hire labor up to the point where the MRP equals the wage rate, because this maximizes profit by ensuring the cost of hiring an additional worker is covered by the revenue they generate.
Note that factors like the firm's total output level or nominal wage alone do not directly determine labor demand; instead, it is the productivity of labor and the price of the output that matter.
Therefore, to determine labor demand, focus on calculating the MRP and comparing it to the wage rate to decide how many workers the firm will employ.
Related Videos
Related Practice
