Read the case and answer the question.
A town has many identical bakeries that sell bread in a perfectly competitive market at Rs 20 a loaf. Each bakery hires workers by the hour, and the hourly wage is set in the town’s labour market. When a bakery hires one more hour of work, its output of bread rises, but each extra hour adds a little less bread than the hour before.
For each bakery, the marginal revenue product of labour is equal to the value of marginal product of labour because:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → the marginal revenue of a perfectly competitive firm equals the price of bread
MRPL is marginal revenue times the marginal product of labour, and VMPL is the price times the marginal product of labour. Each bakery sells every loaf at the market price of Rs 20, so its marginal revenue equals the price.
Option (1) each bakery takes the hourly wage set in the town’s labour market as given — Incorrect. Taking the wage as given is about the cost of labour. It does not link marginal revenue to price.
Option (2) the marginal revenue of a perfectly competitive firm equals the price of bread — Correct. With MR = price, MR × MPL is the same as price × MPL.
Option (3) each extra hour of work adds a little less bread than the hour before it — Incorrect. Diminishing marginal product explains why the labour demand curve slopes down.
Option (4) each bakery earns only normal profit, as bakeries can enter the market freely — Incorrect. Normal profit comes from free entry and exit. It has nothing to do with MR and price.
NCERT (2026-27): “Wage Determination in Labour Market … Since we are dealing with a perfectly competitive firm, marginal revenue is equal to the price of the commoditya and hence marginal revenue product of labour in this case is equal to the value of marginal product of labour (VMPL). As long as the VMPL is greater than the wage rate, the firm will earn more profit by hiring one more unit of labour, and if at any level of labour employment VMPL is less than the wage rate, the firm can increase her profit by reducing a unit of labour employed.” “Wage Determination in Labour Market … To examine the demand for labour by a single firm, we assume that the labour is the only variable factor of production and the labour market is perfectly competitive, which in turn, implies that each firm takes wage rate as given. Also, the firm we are concerned with, is perfectly competitive in nature and carries out production with the goal of profit maximisation. We also assume that given the technology of the firm, the law of diminishing marginal product holds.” |