Question

Why would a perfectly competitive firm be unable to take advantage of a dependence of the marginal product of labor on the level of the wage rate paid by the firm? (Hint: Recall that a firm in a perfectly competitive labor market cannot influence the market clearing and profit-maximizing wage rate.)

Short answer

- According to the marginal choice rule, a corporation will move spending among factors of production if the marginal gain outweighs the marginal cost.

- If the marginal benefit of additional labor, MPL/PL, exceeds the marginal cost, MPK/PK, the firm will be better off investing in labor rather than capital.

- The marginal decision rule states that the labor market must reach equilibrium when MPL/PL=MPK/PK.

Step-by-step solution

Introduction

Two unexpected pay raises had a bigger aggregate effect on workers' marginal productivity than a single unforeseen wage increase of similar total magnitude. As a result, the behavioral response of library workers who received the same overall salary increase in two phases rather than a single wage increase resulted in a greater increase in workers' marginal product and, as a result, in the library's marginal revenue product of labor.

Given Information

A completely competitive firm would be unable to benefit from the marginal product of labor being dependent on the wage rate paid by the firm.

Remember that in an ideal labor market, a firm cannot affect the market clearing and profit-maximizing pay rate.

Explanation

- When the marginal revenue product of labor exceeds the wage rate, firms will hire more workers, and when the two values are equal, they will stop hiring.

- The labor market equilibrium is reached when the MRPL equals the current pay rate.

- According to the marginal choice rule, a corporation will move spending among factors of production if the marginal gain outweighs the marginal cost.

- If the marginal benefit of additional labor, MPL/PL, exceeds the marginal cost, MPK/PK, the firm will be better off investing in labor rather than capital.

- The marginal decision rule states that the labor market must reach equilibrium when MPL/PL=MPK/PK.