Assertion (A): When the wage rate rises, a firm in a perfectly competitive market hires fewer hours of labour, other things remaining the same.
Reason (R): A rise in the wage rate raises the opportunity cost of leisure for workers.
Choose the correct answer from the options given below:
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).
Assertion (A): When the wage rate rises, a firm in a perfectly competitive market hires fewer hours of labour, other things remaining the same. — True. The firm’s demand curve for labour slopes downward.
Reason (R): A rise in the wage rate raises the opportunity cost of leisure for workers. — True. Each hour of leisure now means giving up more income.
Why R does not explain A?
A is about the firm’s demand for labour. R is about workers’ supply of labour: how much leisure they give up. The real reason for A is that the firm hires labour up to w = VMPL. A higher wage needs a higher VMPL, and with diminishing marginal product that means fewer hours.
NCERT (2026-27): “5.1.1 Market Equilibrium: Fixed Number of Firms … 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. To explain why it is so, let us assume at some wage rate w1, demand for labour is l1. Now, suppose the wage rate increases to w2. To maintain the wage-VMPL equality, VMPL should also increase. The price of the commodity remaining constant, this is possible only if MPL increases which in turn implies that less labour should be employed owing to the diminishing marginal productivity of labour. Hence, at higher wage, less labour is demanded thereby leading to a downward sloping demand, curve. …” “Having explored the demand side, we now turn to the supply side. As already mentioned, it is the households which determine how much labour to supply at a given wage rate. Their supply decision is essentially a choice between income and leisure. On the one hand, individuals enjoy leisure and find work irksome and on the other, they value income for which they must work. So there is a trade-off between enjoying leisure and spending more hours for work. To derive the labour supply curve for a single individual, let us assume at some wage rate w1, the individual supplies l1 units of labour. Now suppose the wage rises to w2. This increase in wage rate will have two effects: First, due to the increase in wage rate, the opportunity cost of leisure increases which makes leisure costlier. Therefore, the individual will want to enjoy less leisure. As a result, they will work for longer hours. …” |