A firm that hires labor and sells its product both in purely competitive markets will
A) have a horizontal demand curve for labor.
B) face a downward-sloping demand curve for its product.
C) have a downward-sloping demand curve for labor.
D) have a horizontal supply curve for its product.

Question

Quizplus · Accepted Answer

A firm that hires labor in a purely competitive market will face a perfectly elastic supply of labor, meaning the firm can hire all the labor it wants at the going wage rate. However, the firm's demand for labor will still be downward sloping as it seeks to hire additional units of labor as long as the marginal cost of labor is less than the marginal revenue product of labor. On the other hand, the firm's product will also face a downward-sloping demand curve as it operates in a competitive market where consumers have substitutes for the product.

A Firm That Hires Labor and Sells Its Product Both