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USing the COBB DOUGLAS PRODUCTION FUCNTION how would you respond to the argument that: since labour...

USing the COBB DOUGLAS PRODUCTION FUCNTION how would you respond to the argument that: since labour is characterised by diminishing marginal productivity and since real wages are related to marginal productivity of labour people are always worse off if they work more.

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The marginal product of labor shows how much output changes by addition of 1 unit of labor. Diminishing marginal productivity implies that as labor increases productivity decreases. The real wage shows how much variable cost changes by addition of 1 unit of labor. After addition of labor marginal product of labor is decreased. When MPL<real wage the value of output produced by an additional unit of labor will be less than the cost of employing an additional unit of labor and profit will fall. So firms become worse off if people work more. As at max(MPL) firms get the highest profit, then profit is decreased when MPL fall. Firms layoff some worker to increase marginal productivity so people become worse off if they work more.

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