A major computer software company maintains a technical support center in a rural area and is the only employer in this region. Suppose the firm develops a new software system for managing technical support calls, and the marginal product of labor increases. What happens to the equilibrium outcome in this labor market?
A) Labor demand shifts rightward, equilibrium wage and employment levels decline.
B) Labor demand shifts rightward, equilibrium wage and employment levels increase.
C) Labor demand curve remains the same, equilibrium wage and employment levels increase.
D) Labor demand curve remains the same, equilibrium wage and employment do not change.
E) none of the above

Question

Quizplus · Accepted Answer

If the marginal product of labor increases, it means that each worker can produce more output. This will increase the demand for labor, and as a result, the labor demand curve will shift rightward. Since the firm is the only employer in the region, it has monopsony power and can hire workers at a lower wage than the marginal revenue product of labor. Therefore, the equilibrium wage and employment levels will increase, as the firm hires more workers at a lower wage.

A Major Computer Software Company Maintains a Technical Support Center