How is the optimal amount of labour determined in a perfectly competitive market?
A profit maximising firm will employ labour up to the point where extra wages paid to the last unit of labour is equal to the additional benefit earned by employing that unit of labour.
That is when marginal cost of labour is equal to marginal benefit by labour or wage rate is equal to marginal revenue product.
The optimal amount of labour is determined in a perfectly competitive market as
VMPL = W
Where,
VMPL = Value of Marginal Product of Labour
W = Wage rate
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