Question

Select one:

a. concept of compensating wage differences.

b. least-cost, but not profit-maximizing, combination of inputs.

c. monopoly theory of income distribution.

d. marginal productivity theory of income distribution.

Answer 1

Assuming that the question is asking to select one topic and elaborate on that.

Lets take marginal productivity theory of income.

What this thery says is that any input factor (factors that create the final good, like capital or labor) will keep getting employed in higher quantities s long as the cost of adding one more input is lesser than the benefit derive from getting one more output. Marginal productivity is the addition that the use of one extra unit of the factor makes to the total production. So long as the marginal cost of a factor is less than the marginal productivity, the entrepreneur will go on employing more and more units of the factors. He will stop giving further employment as soon as the marginal productivity of the factor is equal to the marginal cost of the factors.

As an example, if it costs me 10$ to hire one more labor, and the labor produces 2 products which are worth $10 each (total $20), it makes sense for me to hire that labor. But if the produce of the new labor gives me less than 10$, there is no point in hiring. I wont want to take loss. So I will keep hiring more labor until the time the benefit from the labor (or capital) equals the cost of the labor (or capital).

There are a few assumptions that the theory makes. These are-

Perfect Competition: The theory assumes perfect competition because it cannot take into account unequal bargaining power between the buyers and the sellers.

Homogeneous Factors: That is, the quality of new factors is the same as old factors. The new factor also gives the same benefit as old ones.

Rational Behaviour: That the producer is a rational person who wants to maximize profits.

Perfect Mobility:The theory assumes that both labour and capital are perfectly mobile between industries and localities.

Knowledge about Marginal Productivity: Both producers and owners of factors of production have means of knowing the value of factor’s marginal product.

The Law of Diminishing Marginal Returns: It means that as units of a factor of production are increased the marginal productivity decreases.

Long-Run Analysis: That whatever analysis we are doing is for the long run, where factors of production can change.