S4 MRP (at K2) MRP (at K1) 0 1-1 Lo Units of labor l3 12 1 lo Units of labor Fig

Question

S4 MRP (at K2) MRP (at K1) 0 1-1 Lo Units of labor l3 12 1 lo Units of labor Figure 10.3 Refer to Figure 10.3. The market wage is intialy W1 and the frm is ntaly at Point 8. Labor supply increases from s 1 to So. The firm's MRPL curve will shift from MRPL at K2 to MRPL at K1 because the output effect led to an increase in the demand for capital, whichin turn increased the productivity of labor. O the firm is no longer maximizing profits O the supply of labor increased and therefore the productivity of labor increased O the factor substitution effect will cause the firm to substitute capital for the lower-priced labor

Explanation / Answer

Question:- Refer to Figure 10.3. The market wage is initially W1 and the firm is initially at Point B. Labor supply increases from S1 to S2. The firm?s MRPL curve will shift from MRPL at K2 to MRPL atMRPL at K1 because

Answer:-

the output effect led to an increase in the demand for capital, which in turn increased the productivity of labor.

Reason:- When there is an increase in the labor supply which causes MRPL curve to shift towards right-hand side, then this situation will indicate that there is an increase in the capital demand to accommodate the increased supply of labor and due to increased labor supply and capital, it will also improve the productivity of the labor.

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