Wage Determination under Perfect Competition

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Questions and Answers

What determines the equilibrium wage rate under perfect competition?

The equilibrium wage rate is determined where the demand for labour equals the supply of labour.

Describe the outcome when the wage rate rises above the equilibrium level in terms of labour supply and demand.

When the wage rate rises above equilibrium, labour supply exceeds demand, leading to increased competition among labourers and a subsequent decrease in the wage rate.

Explain the three situations a firm may face in the short run regarding profits.

A firm may experience supernormal profits, normal profits, or losses depending on whether the average revenue productivity (ARP) is above, equal to, or below the prevailing wage rate.

In the long run, what kind of profits does a firm earn in a competitive market?

In the long run, a firm earns normal profits as it adjusts to the market conditions and achieves equilibrium. Signup and view all the answers

What happens to a firm's profits when it employs labourers whose ARP is less than the wage rate?

The firm incurs losses when the average revenue productivity of employed labourers is less than the prevailing wage rate. Signup and view all the answers

How does an increase in labour supply affect the wage rate in relation to demand?

An increase in labour supply, with demand remaining constant, leads to excess supply, resulting in a decrease in the wage rate. Signup and view all the answers

What is indicated by the point of intersection of the demand and supply curves for labour?

The point of intersection indicates the equilibrium wage rate in the labour market. Signup and view all the answers

Describe the implications for producers if the wage rate falls below the equilibrium level.

If the wage rate falls below the equilibrium, demand for labour exceeds supply, causing producers to compete for workers, which ultimately increases the wage rate. Signup and view all the answers

What does the term 'supernormal profit' refer to in the context of short-run equilibrium?

Supernormal profit refers to profits that exceed normal profit levels, occurring when a firm employs labourers whose ARP is greater than the wage rate. Signup and view all the answers

In the short run, what is the condition for a firm to achieve normal profit?

A firm achieves normal profit when the average revenue productivity of labourers is equal to the wage rate. Signup and view all the answers

What condition signifies that a firm is in equilibrium concerning labour employment?

A firm is in equilibrium when Average Revenue Product (ARP) equals Marginal Revenue Product (MRP). Signup and view all the answers

How does monopsony in the labour market affect wage rates when the monopolist's demand for labour increases?

An increase in the monopolist's demand for labour leads to higher average and marginal wage rates in a monopsonistic labour market. Signup and view all the answers

What are the two conditions that must be met for a monopolistic firm to reach equilibrium in the labour market?

The two conditions are that marginal wage must equal marginal revenue product, and the MRP curve should intersect the marginal wage curve from above and lie below it. Signup and view all the answers

Explain the concept of exploitation of labour in the context of imperfect competition within the labour market.

Imperfect competition allows monopolistic firms to pay wages less than marginal revenue productivity, leading to the exploitation of labour. Signup and view all the answers

What distinguishes the 'Value of Marginal Product' (VMP) from the 'Marginal Revenue Product' (MRP) in a monopolistic setting?

The VMP is the product of Marginal Physical Product (MPP) and the price of the commodity, while MRP is the additional revenue generated by selling one more unit of output. Signup and view all the answers

What is the implication of double exploitation of labour in a scenario of monopoly in product and monopsony in labour markets?

Double exploitation means that workers face both monopolistic and monopsonistic exploitation, resulting in lower wages and reduced bargaining power. Signup and view all the answers

In situations of perfect competition in the product market combined with monopsony in the labour market, how are wage rates determined?

Wage rates are determined by the monopsonist's willingness to pay based on the marginal wage curve they face. Signup and view all the answers

At equilibrium in a monopsonistic market, what are the implications of the area PLMN?

Area PLMN represents the supernormal profits earned by the monopolist due to exploiting labour. Signup and view all the answers

Describe the impact of an increase in employment on the wage curve in a monopsonistic labour market.

An increase in employment leads to an upward shift in the wage curve, requiring the monopsonist to offer higher wages to attract additional labourers. Signup and view all the answers

How does the equilibrium point E signify the relationship between MRP and MW in monopsony?

At point E, MRP equals MW, confirming that the wage rate is determined at this balance where the firm employs a specific amount of labour. Signup and view all the answers

Study Notes