Suppose the labor market is perfectly competitive, but the output market is not. When the labor market is in equilibrium, the wage rate will:
A) be less than the marginal revenue product of labor.
B) equal the marginal revenue product of labor.
C) be greater than the marginal revenue product of labor.
D) None of the above is necessarily correct.

Question

Quizplus · Accepted Answer

In a perfectly competitive labor market, the wage rate will equal the marginal revenue product of labor (MRP). However, in an imperfectly competitive output market, MRP may not equal the price of the output. If MRP is greater than the price, firms are willing to pay a higher wage rate to attract more workers and increase output. If MRP is less than the price, firms will only hire workers until MRP equals the wage rate, creating a wage rate equal to MRP. Therefore, the correct answer is B: the wage rate will equal the marginal revenue product of labor.

Suppose the Labor Market Is Perfectly Competitive, but the Output