Because the productivity of labor decreases as the quantity of labor employed increases,

Question

Quizplus · Accepted Answer

This is known as the law of diminishing returns, where adding more units of a variable input (like labor) to a fixed input (like capital) leads to a decrease in the marginal product of labor. As firms want to maximize profits, they will only hire labor up to the point where the marginal revenue product (the additional revenue from hiring one more unit of labor) equals the wage rate. As the real wage rate decreases, the marginal revenue product of labor increases, leading firms to demand more labor. Therefore, the quantity of labor a firm demands increases as the real wage rate decreases.

Because the Productivity of Labor Decreases as the Quantity of Labor