Think of our discussion about wage determination under a perfectly competitive labor market where firms maximize...

Think of our discussion about wage determination under a perfectly competitive labor market where firms maximize profits. With the help of a graph, discuss how would labor demand and supply forces interact to reach market clearing level of wage and employment (hint: think of bidding up and bidding down).

Solutions

Expert Solution

Under a perfectly competitive labor market, firms are wage-takers. The equilibrium wage is determined by market forces of demand and supply of labor.

Hence, the supply curve of the labor that the firm is facing is a horizontal straight line. The demand curve of the labor is given by Marginal Revenue Product of Labor (MRP) as shown in the diagram given below.

Rahul Sunny answered 1 year ago

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