When a firm is a perfect competitor in the product market,its demand curve for labor will _____ because the _____ product declines as additional workers are hired.

Question

Quizplus · Accepted Answer

When a firm is a perfect competitor in the product market, it cannot influence the price of the product, and therefore its demand for labor is perfectly elastic (horizontal). However, the additional worker hired adds less and less to the total output, and so the additional revenue obtained by the firm from hiring an extra worker (marginal revenue product) declines. As a result, the firm will hire workers up to the point at which the wage rate equals the marginal revenue product of labor. This implies that the demand curve for labor will slope downward because the marginal revenue product of labor declines as more workers are hired.

When a Firm Is a Perfect Competitor in the Product