The Impact of Decreasing Wage Rate on Marginal Revenue Product for Labor

What is the potential impact of decreasing the wage rate on the marginal revenue product for labor at Ajax?

A) It would remain the same.

B) It would increase since Ajax's demand for labor curve will shift.

C) It would increase since the price of widgets would decrease.

D) It would decrease since Ajax will hire more workers.

Answer:

The correct answer is: It would decrease since Ajax will hire more workers. (D)

Marginal Revenue Product for Labour (MRPL) is the extra labor generated when an extra worker is employed. In this case, since the wages decreased from $25 to $20, Ajax will hire more workers because it can afford to pay more workers. Meanwhile, the extra labor generated on the employment of an extra worker will decrease.

The MRPL is used by firms to determine the number of labor to employ since they have to employ the right amount of labor to maintain profit and prevent diminishing returns associated with excess labor employment.