ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Given that firms are profit-maximizing and competitive, the value of the marginal product of labor is what determines the demand curve. This is because the marginal product of labor tells the firm what an additional unit of labor will produce. An example: if a firm hires two workers they can produce 2 cars per day.

Detailed explanation-2: -A profit-maximizing firm will base its decision to hire additional units of labor on the marginal decision rule: If the extra output that is produced by hiring one more unit of labor adds more to total revenue than it adds to total cost, the firm will increase profit by increasing its use of labor.

Detailed explanation-3: -A competitive, profit-maximizing firm hires workers up to the point where the value of the marginal product of labor is equal to the wage.

Detailed explanation-4: -When the marginal revenue product of labor is graphed, it represents the firm’s labor demand curve. The demand curve is downward sloping due to the law of diminishing returns; as more workers are hired, the marginal product of labor begins declining, causing the marginal revenue product of labor to fall as well.

Detailed explanation-5: -For a competitive, profit-maximizing firm, the value-of-marginal-product curve is also the firm’s labor-demand curve.