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Use marginal productivity theory to explain how wages are determined. Be sure to explain the marginal...

Use marginal productivity theory to explain how wages are determined. Be sure to explain the marginal revenue product (MRP) and the demand curve for labor (D) for the firm in your response.

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Answer #1

A firm will maximize profit when the additional revenue generated by the last unit of labor hired equals the additional cost of hiring that last unit of labor.

Additional revenue generated by last unit of labor is known as Marginal revenue product of labor (MRPL), which is the product of Marginal productivity of labor (MPL) and output price. This is the demand curve for labor. Since additional cost of hiring that last unit of labor is the wage rate paid to that unit of labor, the profit maximizing condition (and profit maximizing wage rate) is:

MRPL = MPL x Output price = Wage rate

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