Suppose the marginal product of labor equals 1/L.If the wage is $1 per unit of labor,what is the short-run effect on the firm's labor demand if the price of output were to double?
A) The firm will demand half as much labor.
B) The firm will demand twice as much labor.
C) The firm will demand the same quantity of labor.
D) There is not enough information to determine.

Question

Quizplus · Accepted Answer

When the price of output doubles, the revenue generated per unit of output also doubles. Given that the marginal product of labor (MPL) is 1/L, and the wage is constant at $1, the firm's revenue from the additional output produced by an additional unit of labor becomes more valuable. This incentivizes the firm to demand more labor to produce more output and take advantage of the higher prices. Thus, the firm will demand twice as much labor.

Suppose the Marginal Product of Labor Equals 1/L