-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 product it produces decreases. 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 product it produces decreases. 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

A decrease in the product price reduces the marginal revenue product (MRP) of labor, shifting the demand for labor from MRP₁ to MRP₂.

-Refer to the Above Graph