Suppose the labor market and all output markets are perfectly competitive. 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 be equal to the marginal revenue product of labor (MRP). This is because in a competitive market, firms are price takers and must hire workers at the going wage rate. If the wage rate is below the MRP, then firms will increase their demand for labor, driving up the wage rate. If the wage rate is above the MRP, then firms will reduce their demand for labor, causing the wage rate to fall. Therefore, in equilibrium, the wage rate will be equal to the MRP.

Suppose the Labor Market and All Output Markets Are Perfectly