An increase in the price of a firm's output increases the firm's demand for labour because the
A) value of marginal product curve becomes flatter.
B) value of marginal product curve becomes steeper.
C) value of marginal product of each worker increases.
D) marginal product of each worker increases.

Question

Quizplus · Accepted Answer

The value of the marginal product of labor is the additional revenue a firm earns from hiring one more unit of labor, calculated as the marginal product of labor times the price of the output. When the price of a firm's output increases, the revenue generated from each additional unit of labor (holding productivity constant) also increases, hence increasing the firm's demand for labor. This is because the value of the marginal product of each worker increases with the price of the output, making it more profitable for the firm to hire additional workers.

An Increase in the Price of a Firm's Output Increases