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Marginal Product and Labor Costs
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Which of the following statements accurately describe the relationship between marginal product of labor and marginal factor cost in a perfectly competitive labor market? Select all that apply.

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Choose the Best Answer

A

Firms will continue to hire additional workers as long as the marginal revenue product of labor exceeds the wage paid to workers.

B

An increase in the marginal product of labor will lead to a decrease in the equilibrium wage rate in the market.

C

If the marginal factor cost exceeds the marginal product of labor, firms should reduce their workforce to maximize profits.

D

In a perfectly competitive labor market, firms have control over the wage rate they pay to attract more labor.

E

When the marginal revenue product of labor equals the wage, firms are at their optimal level of employment.

Understanding the Answer

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Answer

In a perfectly competitive labor market, the marginal product of labor refers to the additional output produced by hiring one more worker. The marginal factor cost is the cost of hiring that additional worker, which is typically the wage paid to them. In this market, when a firm hires more workers, it will continue to do so as long as the marginal product of labor is greater than or equal to the marginal factor cost. For example, if hiring one more worker increases production by 10 units and costs $200, the firm will compare this to the wage to decide if it’s worth it. Therefore, the relationship between these two concepts helps firms determine the optimal number of workers to hire to maximize their profits.

Detailed Explanation

In a perfectly competitive labor market, firms hire workers until the wage equals the value of what each worker produces. Other options are incorrect because This suggests firms will hire workers even if the cost is higher than what they produce; This implies that more productivity leads to lower wages, which is not true.

Key Concepts

Marginal Product of Labor
Marginal Factor Cost
Perfectly Competitive Labor Market
Topic

Marginal Product and Labor Costs

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hard level question

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