The wage rate will increase and firms will decrease employment to the point where MRP equals the new wage rate if
A) the demand for labor decreases.
B) the demand for labor increases.
C) the supply of labor decreases.
D) the supply of labor increases.

Question

Quizplus · Accepted Answer

When the supply of labor decreases, the wage rate will increase because there is less labor available. Firms will then decrease employment to the point where the marginal revenue product (MRP) of labor equals the new, higher wage rate, as they seek to optimize their labor costs relative to productivity.

The Wage Rate Will Increase and Firms Will Decrease Employment