Suppose a firm hires both labor (L) and capital (C) under purely competitive conditions. The price of labor is P_L, and that of capital is P_C. The marginal product of labor is MP_L, and that of capital is MP_C. The firm sells its product competitively at a price of P_X. In competitive labor markets, the marginal cost of an additional unit of labor A) is equal to P_L× MP_L. B) is equal to MP_L/P_L. C) is equal tp P_L D) cannot be determined from the information given.

Question

Quizplus · Accepted Answer

In competitive labor markets, the marginal cost of an additional unit of labor is simply the wage rate, which is P_L.

Suppose a Firm Hires Both Labor (L) and Capital (C)