When the market demand of labor decreases:
A The wage individual firms pay will fall.
B profit-maximizing firms will hire more workers.
C The wage individual firms pay will rise.
D The marginal product of workers will decrease.
The correct answer and explanation is:
The correct answer is A: The wage individual firms pay will fall.
Explanation:
When the market demand for labor decreases, it means that there is less need for workers in the economy. As a result, firms will be less willing to pay higher wages for labor, and this leads to a decrease in wages. The reduced demand for labor makes workers less valuable in the eyes of employers, and they will adjust their wage offers accordingly.
This decrease in labor demand can occur for several reasons. For example, a reduction in the overall demand for goods and services could cause firms to reduce their production levels, thus lowering the demand for labor. Similarly, technological advancements or increased automation may replace certain jobs, leading to a decrease in the need for human workers.
When firms anticipate that there is an oversupply of labor in the market (due to lower demand), they will reduce wages to maintain profitability. As a result, the equilibrium wage—the wage at which the supply of labor equals demand—will adjust downwards.
In terms of employment, firms will not hire more workers, as the demand for labor has decreased. Rather, they may even reduce their workforce to align with the new, lower demand for labor. This is why B: Profit-maximizing firms will hire more workers is not correct. Additionally, the marginal product of labor (the additional output produced by one more worker) is also likely to decrease in response to lower demand, but this is not the most direct result of a decrease in labor demand. Therefore, D: The marginal product of workers will decrease is not as directly tied to the wage reduction as A. Finally, C: The wage individual firms pay will rise is the opposite of what happens when labor demand falls, making it incorrect.