Question

f the supply of labor increases, which of the following events will occur? The wage rate will fall and firms will decrease employment to the point where MRP equals the new wage rate. The wage rate will fall and firms will increase employment up until the point where MRP equals the new wage rate. The wage rate will increase and firms will decrease employment to the point where MRP equals the new wage rate. The wage rate will increase and firms will increase employment up until the point where MRP equals the new wage rate.

Answer 1

The answer is "The wage rate will fall and employment will be increased until the new wage rate is equal to MRP.

Step-by-step explanation:

Firms always try to maximize their profit. Therefore when they hire labor, the increase in labor costs must be lower than the labor's increase to the firm's total revenue. And this forms the "Marginal Revenue Productivity" which is simply the theory that suggests "Wages are paid at a level that is equal to the value of the marginal product of labor". Supply of labor is a function that is inversely proportional with wage rate. So if the supply of labor increases, the correct answer is that "The wage rate will fall and firms will increase employment until MRP equals the new wage rate." Hope this was helpful.