Which of the following correctly explains the effect of an increase in the marginal product of labor on the labor demand curve in a perfectly competitive market?

• A. The labor demand curve does not change because the marginal product of labor does not affect labor demand.
• B. The labor demand curve becomes vertical, indicating that labor demand is perfectly inelastic.
• C. The labor demand curve shifts to the left because firms require fewer workers at each wage rate.
• D. The labor demand curve shifts to the right because firms are willing to hire more workers at each wage rate.

Answer: (D)

Verified step by step guidance

1. Recall that in a perfectly competitive labor market, the labor demand curve is derived from the value of the marginal product of labor (VMPL), which is calculated as \(\text{VMPL} = \text{MPL} \times P\), where \(\text{MPL}\) is the marginal product of labor and \(P\) is the price of the output.
2. Understand that an increase in the marginal product of labor (MPL) means each additional worker produces more output, which raises the VMPL, assuming the output price remains constant.
3. Since the labor demand curve represents the relationship between the wage rate and the quantity of labor demanded, an increase in VMPL makes hiring labor more profitable at every wage rate.
4. This increased profitability causes the labor demand curve to shift to the right, indicating that firms are willing to hire more workers at each given wage rate.
5. Therefore, the correct explanation is that the labor demand curve shifts to the right due to the increase in the marginal product of labor, reflecting higher labor demand.