The wage rate will fall and firms will increase 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 increases, there is more labor available at each wage rate. This increased supply puts downward pressure on wages, causing the wage rate to fall. Firms respond to the lower wage rate by hiring more workers, increasing employment until the marginal revenue product (MRP) of labor equals the new, lower wage rate. This is because firms seek to hire additional workers as long as the additional revenue generated by the last worker hired (MRP) is greater than or equal to the cost of hiring that worker (the wage rate).

The Wage Rate Will Fall and Firms Will Increase Employment