CBSE Class 12-commerce Answered

Under the assumption of the law of diminishing marginal product, the firm will employ labour until the wage rate w is equal to the marginal product of labour MRP_L which is equal to value of marginal product of labour VMP_{L .}

w = MRP_L

MRP_L = MR * MP_L

MRP_L = VMP_L

When there is an increase in wage rate, VMP_L also increases to maintain the wage and VMP_L equality.  The price of the product remains constant with an increase in the MP_L. Because of  law of diminishing marginal utility, at a higher wage rate, the demand for labour decreases which lead to a downward sloping demand curve. Thus, each firm demands less labour as wage increases and the market demand curve is also downward sloping curve as shown in the diagram.