If a perfectly competitive firm is a factor price taker,

Question

Quizplus · Accepted Answer

In a perfectly competitive market, the firm is a price taker and cannot influence the price of the factors of production, including wages for labor. Therefore, the firm will hire labor up to the point where the value of the marginal product (VMP) of labor equals the wage rate (factor price). At this point, the firm is maximizing profits because any additional units of labor would add a cost higher than the benefit received. This also means that the marginal revenue product (MRP) of labor equals the marginal factor cost (MFC) at the profit-maximizing factor quantity. Therefore, B is the correct choice. C and D are incorrect because in a perfectly competitive market, the factor price is equal to the MFC and VMP is equal to MRP.

If a Perfectly Competitive Firm Is a Factor Price Taker