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marginal productivity theory

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Minimum wage legislation requires most firms to pay workers no less than the legislated minimum wage per hour. Using marginal productivity theory, explain how a change in the minimum wage affects the employment of unskilled labor.

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In a competitive market factor payments are determined by the productivity of factors of production. Labor is no different. Labor payments, or wages, are determined by the productivity of labor. In a market economy the government can legislate a minimum wage, but they cannot legislate that companies have to hire! When governments change minimum wages they are not changing the productivity of labor.

When firms see minimum wages change, ...

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This posting resolves marginal productivity theory.

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Marginal Productivity Theory

What if a firm employs 10 workers and pays each $15 per hour. Further assume that the MP of the 10th worker is 5 units of output and that the price of the output is $4. According to economic theory, in the short run,

a. the firm should hire additional workers.
b. the firm should reduce the number of workers employed.
c. the firm should continue to employ 10 workers.
d. More information is required to answer this question.

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