Question

Describe why the MPL curve is the labor demand curve

Answer 1

Suppose kn a bakery, the price of bread "P" is $3 per loaf. And a worker earns a wage "W" of $30/- hour . The real wage W/P is 10 loaves per hour. So the form keeps hiring workers as long as the additional labor would produce at least 10 loaves per hour. So, when the MPL falls to 10 loaves per hour or less, hitting additional labor would not be profitable.

Therefore, MPL depends on the amount of labor employed keeping the firm's capital constant. So, whe MPL diminishes as the amount of labor increase, the curve slpoes downward. And, for any given real wage , the firm hires upto the point at which MPL equals real wage of labor.

Hence, MPL curve is the labor demand curve.