The marginal productivity theory of factor pricing jkssb FAA

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The marginal productivity theory of factor pricing is an economic theory that explains how the price of a factor of production (such as labor or capital) is determined by its marginal productivity, or the increase in output that results from an additional unit of the factor. The theory states that the price of a factor of production will be equal to its marginal productivity, or the additional revenue that is generated by using an additional unit of the factor.

An important aspect of the marginal productivity theory is that it assumes that the other factors of production are held constant. This means that if an additional unit of labor is added to a production process, for example, the theory assumes that the amount of capital, land, and other inputs remains the same. This allows us to isolate the effect of the additional unit of labor on output and revenue.

The following are a few important MCQs on the subject:

  1. Which of the following is a key assumption of the marginal productivity theory of factor pricing? 

    A) The price of a factor of production is determined by its marginal productivity. 

    B) The other factors of production are held constant. 

    C) The demand for a factor of production is inelastic. 

    D) All of the above 

    Answer: B

  2. According to the marginal productivity theory of factor pricing, the price of a factor of production will be equal to: 

    A) Its total productivity. 

    B) Its marginal productivity. 

     C) The number of units of the factor that are used in production.

     D) None of the above. 

    Answer: B

  3. Which of the following is not an assumption of the marginal productivity theory? 

    A) Perfect competition 

    B) Constant returns to scale 

    C) Complete mobility of the factors of production 

    D) Perfectly inelastic demand for the output 

    Answer: D

Note that this theory is one of the many developed for explaining the relationship between wage and productivity and it's has it's own assumptions, criticisms and scope of applicability, which is important to know for a comprehensive understanding of the topic.

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