Read the chain showing why a firm’s demand curve for labour slopes downward and find the missing step (?):
Wage rate rises from w1 to w2 → To keep the wage equal to VMPL, VMPL must also rise → (?) → Less labour is employed because of diminishing marginal product of labour → At a higher wage, less labour is demanded
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → The price being constant, the marginal product of labour must rise
A firm hires labour up to where the wage equals VMPL, and VMPL is the price times the marginal product of labour. If the price does not change, VMPL can rise only if the marginal product of labour rises. That happens only when less labour is used.
Option (1) The marginal revenue of the firm falls below the price of the commodity — Incorrect. For a perfectly competitive firm, marginal revenue equals the price. It does not fall below it.
Option (2) The firm raises the price of its commodity to cover the higher wage — Incorrect. A perfectly competitive firm is a price taker. It cannot raise the price of its good.
Option (3) With the wage now higher, the total product of labour must rise — Incorrect. The rule is about the marginal product, not the total product. Using less labour lowers total product.
Option (4) The price being constant, the marginal product of labour must rise — Correct. With the price fixed, a higher VMPL needs a higher marginal product.
NCERT (2026-27): “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. 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 constantb, 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. To arrive at the market demand curve from individual firms’ demand curve, we simply add up the demand for labour by individual firms at different wages and since each firm demands less labour as wage increases, the market demand curve is also downward sloping.” |