Question 1. The theory can get pretty complex, but the basic points stay the same, so let's look at it in its simplest version: Suppose we are in a short-run situation and that only the quantity of labour can be modified (so the quantity of capital is fixed). In this situation...

a. Define the concept of "value of the marginal product of labour" (VMP hereafter).

b. Explain why, assuming it can be measured at all the VMP could be expected to be downward-sloping (decreasing as the quantity of labour increases).

c. Suppose for a second that the wage is given (that is, it does not vary). Explain how the VMP might help a firm choose the right amount of labour to hire.

d. Assuming the VMP curve is downward-sloping, explain why it could be a representation of the labour demand curve of a firm. NOTE: For the labour market, remember that the price is the wage.

e. And to complete the picture, we need a labour supply curve. Explain why that curve could be upward-sloping.

Question 2. Not every economist is happy with the neo-classical theory of wage determination. For example, Moshe Adler, in "Economics for the Rest of Us", gives us quite a scathing critique of that theory. One of his issues is that it is impossible to calculate the VMP of individual workers. Explain that argument, both logically and using the evidence Adler provides.