When the factor market is purely competitive, the firm's average expenditure curve for a factor of production is:
A) upward sloping and to the right of the marginal expenditure curve.
B) downward sloping and to the right of the marginal expenditure curve.
C) identical to the marginal expenditure curve.
D) downward sloping and to the left of the marginal expenditure curve.

Question

Quizplus · Accepted Answer

In a purely competitive factor market, the firm is a price taker and the price of the factor is determined by the market. Therefore, both the average expenditure curve and the marginal expenditure curve are horizontal and identical. This means that the firm pays the same price for each additional unit of the factor they hire, and the total expenditure increases in a straight line.

When the Factor Market Is Purely Competitive, the Firm's Average