- Refer to the above graph. Suppose that a competitive firm in long-run equilibrium faces a market wage W₀ as shown. Suddenly, the price of the output it produces increases. If other things remain the same, the short-run effect of this change in price would be to:

Question

- Refer to the above graph. Suppose that a competitive firm in long-run equilibrium faces a market wage W<sub>0</sub> as shown. Suddenly, the price of the output it produces increases. If other things remain the same, the short-run effect of this change in price would be to: A) increase the firm's demand for labor from MRP<sub>1</sub> to MRP<sub>3</sub>. B) decrease the firm's demand for labor from MRP<sub>1</sub> to MRP<sub>2</sub>. C) increase the market wage rate to W<sub>1 </sub>and decrease the quantity of labor the firm demands to point A. D) decrease the market wage rate to W<sub>2</sub> and increase the quantity of labor the firm demands to point B.

Quizplus · Accepted Answer

When the price of the output increases, the firm's marginal revenue product (MRP) of labor increases, shifting the demand for labor curve to the right from MRP1 to MRP3.

- Refer to the Above Graph