Assertion (A): If the value of marginal product of labour exceeds the wage rate, a perfectly competitive firm earns more profit by hiring one more unit of labour.
Reason (R): Given the law of diminishing marginal product, the demand curve for labour of the firm slopes downward.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Both statements are about a firm’s demand for labour, but they answer different questions. A gives the rule for hiring; R gives the slope of the demand curve.
Assertion (A): If the value of marginal product of labour exceeds the wage rate, a perfectly competitive firm earns more profit by hiring one more unit of labour. — True. If VMPL is more than the wage, the last unit of labour adds more to revenue than to cost. Hiring one more unit raises profit.
Reason (R): Given the law of diminishing marginal product, the demand curve for labour of the firm slopes downward. — True. At a higher wage, the firm needs a higher MPL, so it hires less labour. The demand curve slopes down.
Why R does not explain A?
R tells us how the labour demanded changes when the wage changes. It says nothing about why hiring more pays when VMPL is above the wage.
A holds because for a perfectly competitive firm MR equals price, so MRPL equals VMPL. When VMPL is greater than the wage, the extra benefit is more than the extra cost of that unit of labour.
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 … Given the assumption of the law of diminishing marginal product, the fact that the firm always produces at w = VMPL implies that the demand curve for labour is downward sloping.” |