A profit-maximizing firm in a competitive market that is producing on a production curve where the marginal product of labor is diminishing also has
A) an upward-sloping labor demand curve.
B) a downward-sloping labor demand curve.
C) a perfectly elastic labor supply curve.
D) a perfectly inelastic labor supply curve.
E) a perfectly inelastic labor demand curve.

Question

Quizplus · Accepted Answer

When the marginal product of labor is diminishing, the firm's demand for labor becomes downward-sloping. This is because as the firm hires more labor, each additional unit of labor becomes less productive, thus reducing the marginal revenue product of labor. Therefore, the firm must lower the wage it is willing to pay for each unit of labor in order to continue maximizing profits.

A Profit-Maximizing Firm in a Competitive Market That Is Producing