When factor markets are competitive, it always pays a profit-maximizing firm to
A)use more of the factor.
B)bid very low prices for inputs.
C)reduce the use of all inputs.
D)use that quantity of input that makes MRP equal to the price of the input.

Question

Quizplus · Accepted Answer

When factor markets are competitive, the price of the input is equal to its marginal revenue product (MRP). Hence, a profit-maximizing firm will use that quantity of input, where MRP is equal to the price of the input, to attain maximum profit. Therefore, option D is correct. Options A and C are incorrect, as they suggest using more or less input, which may not necessarily lead to profit maximization. Option B is incorrect, as bidding very low prices for inputs may lead to lower quality inputs, which can negatively affect the firm's productivity and revenue.

When Factor Markets Are Competitive, It Always Pays a Profit-Maximizing