For a firm buying factors of production in a perfectly competitive factor market:
A) factors are hired where marginal revenue product is less than marginal factor cost.
B) its marginal revenue product curve for a factor is its factor supply curve.
C) the price of a factor will be greater than its marginal revenue product.
D) the price of a factor will equal its marginal factor cost.

Question

Quizplus · Accepted Answer

In a perfectly competitive factor market, the price of a factor will equal its marginal factor cost. A firm will hire factors of production where the marginal revenue product (MRP) is equal to the marginal factor cost (MFC). This is because in a perfectly competitive market, firms are price takers and have no control over the price of factors, and hence, they must pay the prevailing market price for the factors they need. Any deviation from the market price, either by offering a higher price or a lower price, will result in the firm losing out to other buyers or paying more than necessary, respectively. Therefore, the firm will hire factors up to the point where MRP is equal to MFC, and the price paid for a factor will be equal to MFC.

For a Firm Buying Factors of Production in a Perfectly