An increase in the price of the output produced by labour will:Group of answer choicesdecrease the supply of labourdecrease the demand for labourincrease the demand for labourincrease the supply of labour
Question
An increase in the price of the output produced by labour will:Group of answer choicesdecrease the supply of labourdecrease the demand for labourincrease the demand for labourincrease the supply of labour
Solution 1
An increase in the price of the output produced by labour will increase the demand for labour. Here's a step-by-step explanation:
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The demand for labour is derived from the demand for the goods and services that labour produces. This is known as derived demand.
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When the price of the output produced by labour increases, it means that firms can sell their goods or services at a higher price. This increases the revenue that firms can earn from each unit of output.
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As a result, the value of the marginal product of labour (VMPL) - which is the additional revenue a firm gets from hiring one more worker - also increases. This is because the VMPL is calculated by multiplying the marginal product of labour (the additional output produced by one more worker) by the price of the output.
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When the VMPL increases, firms have an incentive to hire more workers. This is because the additional revenue they can earn from the extra output produced by new workers is greater than before.
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Therefore, an increase in the price of the output produced by labour will increase the demand for labour. This is represented by a rightward shift of the labour demand curve in a supply and demand model of the labour market.
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It's important to note that this doesn't necessarily mean the supply of labour will change. The supply of labour is determined by factors like the working-age population and people's willingness to work at different wage rates. An increase in the price of output doesn't directly affect these factors.
Solution 2
An increase in the price of the output produced by labour will increase the demand for labour. Here's a step-by-step explanation:
-
The demand for labour is derived from the demand for the goods and services that labour produces. This is known as derived demand.
-
When the price of the output produced by labour increases, it means that firms can sell their goods or services at a higher price. This increases the revenue that firms can earn from each unit of output.
-
As a result, the value of the marginal product of labour (VMPL) - which is the additional revenue a firm gets from hiring one more worker - also increases. This is because the VMPL is calculated by multiplying the marginal product of labour (the additional output produced by one more worker) by the price of the output.
-
When the VMPL increases, firms have an incentive to hire more workers. This is because the additional revenue they can earn from the extra output produced by new workers is greater than before.
-
Therefore, an increase in the price of the output produced by labour will increase the demand for labour. This is represented by a rightward shift of the labour demand curve in a supply and demand model of the labour market.
-
It's important to note that this doesn't necessarily mean the supply of labour will change. The supply of labour is determined by factors like the working-age population and people's willingness to work at different wage rates. An increase in the price of output doesn't directly affect these factors.
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