Explain the relationships between the marginal product of labor and the demand for labor, and the marginal product of capital and the demand for capital
What will be an ideal response?
The marginal product of labor is the extra output a firm receives from adding one more unit of labor, holding all other inputs and efficiency constant. Firms hire workers up to the point where the marginal product of labor equals the real wage, and since the real wage is determined by the demand for labor, the marginal product of labor is the demand for labor. The marginal product of capital is the extra output a firm receives from adding one more unit of capital, holding all other inputs and efficiency constant. Firms purchase capital up to the point where the marginal product of capital equals the real rental price of capital, and since the real rental price of capital is determined by the demand for capital, the marginal product of capital is the demand for capital.
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