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Question
Microeconomics
Posted 5 months ago

Madam Malkin's produces and sells robes, and the wage it pays its workers is set in the labor market. The value of the firm's marginal product of labor (MPL)\left(M P_{L}\right) decreases as it hires more workers, even though it can always sell a robe for the same price.

Which of the following is true based on the information above?

Choose 1 answer:
(A) The firm sells in an imperfectly competitive market and hires labor in a perfectly competitive market.
(B) The firm sells in a perfectly competitive market, but we cannot determine the competitiveness of the labor market.
(c) The firm sells in a perfectly competitive market and hires labor in an imperfectly competitive market.

D The firm sells in a perfectly competitive market and hires labor in a perfectly competitive market.
(E) The firm sells in an imperfectly competitive market and hires labor in an imperfectly competitive market.
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Answer from Sia
Posted 5 months ago
Solution
a
Market Type: The firm sells robes at a constant price, indicating it operates in a perfectly competitive product market
b
Labor Market: The wage is set in the labor market, suggesting a perfectly competitive labor market
c
Marginal Product of Labor: The marginal product of labor decreases as more workers are hired, which is typical in a perfectly competitive market due to diminishing marginal returns
Answer
The firm sells in a perfectly competitive market and hires labor in a perfectly competitive market.
Key Concept
Perfectly Competitive Markets
Explanation
In a perfectly competitive market, firms are price takers and can sell as much as they want at the market price. The labor market is also perfectly competitive if the wage rate is determined by the market and not by individual firms.

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