Question

When labor productivity increases over time, generally A) it is due to increases in the number of workers b) so do average wages C) it results in higher prices for goods and services .

Answer 1

b) so do average wages

Step-by-step explanation:

• In perfect competition's equilibrium, productive factors are paid according to their marginal productivity. This means that productive factors' payments will be directly explained by their productivity.
• This comes from the fact that a firm maximizes profits, subject to its budget constraint, in an optimal way. Equilibrium solution will result in the following condition:
  `(MP_L)/(MP_K) =(P_L)/(P_K)=(Wages)/(P_K)`, where
  `MP_L` is the marginal productivity of labour and
  `PM_K` is the marginal product of capital,
  `P_L` is the price of labour (or wages) and
  `P_K` is the price of capital.
• Then, because the price of labour is proportional to its productivity, if labour productivity rises, the price of labour will increase.