Assume that the labor market is perfectly competitive. An increase in the productivity of labor

Question

Quizplus · Accepted Answer

An increase in the productivity of labor causes firms to be willing to pay more for each unit of labor, which results in an increase in the demand for labor. This is because each worker is now more productive, so the firm can produce more output with the same amount of labor or the same output with less labor. Therefore, the marginal product of labor increases, leading to an increase in the demand for labor. As a result, wages will also increase, reflecting the higher productivity of labor. Option A is incorrect because an increase in productivity does not cause the marginal factor cost of labor to decrease. Option B is incorrect because an increase in productivity generates a higher wage rate, not a lower one. Option D is incorrect because an increase in productivity causes an increase in the demand for labor, not a reduction.

Assume That the Labor Market Is Perfectly Competitive