Chapter 13R, Problem 18MCQ

To determine

The correct option that defines the demand curve for labor in the firm which operates in product market as monopolist and operates as perfect competition in factor market.

Answer to Problem 18MCQ

Option e is correct.

Explanation of Solution

Explanation for correct option:

e.

In perfect competitive firm, demand curve for labor slopes downward due to decreasing marginal revenues. As the wages rates reduced the quantity demanded increases or vice-versa. This means that if wage rates are increased, the demand for labor decreases due to decreasing marginal revenues. Hiring more workers will not be beneficial because of reducing marginal revenues as the cost of hiring additional worker. Therefore, option e is correct.

Explanation for incorrect options:

a.

Demand curve will be downward sloping as it has market powers in product market. Therefore, option a is incorrect.

b.

Demand curve for perfect competition will be downward sloping where labor quantity varies with the varying wage rates or factor income. Therefore, option b is incorrect.

c.

Diminishing marginal returns refers to the output produced by the additional worker is less as compared to the previous worker. In this case, marginal revenue will decrease as firm is working as both a monopolist and a perfect competitor. Therefore, option c is incorrect.

d.

Diminishing marginal returns will be the reason if firm will operate solely in the perfect competitive market. Therefore, option d is incorrect.

Economics Concept Introduction

Product market and factor market: Market place where goods and services are traded is referred as product market whereas a place where factor of productions are traded is termed as factor market.

Factor of production: Factor of production refers to the components or the resources that are required for producing intangible or tangible products.

Factor income: Factor income refers to returns received by the producer for inserting each factor of production as an input.