Question

What is the labor theory of value? What are the problems with this theory?

Answer 1

The labor theory of value says that price of goods and services should be equal to the value of labor (wages). It is a classical theory.

Criticisms of the theory/ problem: One common critique is that the selling price per unit of a good or service minus the variable cost per unit determines the contribution margin which contributes to the coverage of fixed costs; thus, the selling price of a good or service in a market itself is determined by supply and demand, consumer choice, and advertising, rather than labor.