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 $\left(M P_{L}\right)$ 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 a perfectly competitive market, but we cannot determine the competitiveness of the labor market.
(B) The firm sells in an imperfectly competitive market and hires labor in an imperfectly competitive market.
(C) The firm sells in a perfectly competitive market and hires labor in an imperfectly competitive market.
(D) The firm sells in an imperfectly competitive market and hires labor in a perfectly competitive market.
(E) The firm sells in a perfectly competitive market and hires labor in a perfectly competitive market.

Question

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 $\left(M P_{L}\right)$ 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 a perfectly competitive market, but we cannot determine the competitiveness of the labor market.
(B) The firm sells in an imperfectly competitive market and hires labor in an imperfectly competitive market.
(C) The firm sells in a perfectly competitive market and hires labor in an imperfectly competitive market.
(D) The firm sells in an imperfectly competitive market and hires labor in a perfectly competitive market.
(E) The firm sells in a perfectly competitive market and hires labor in a perfectly competitive market.

Accepted Answer

∻Solution∻ ‖ a ⋮ Understanding Perfectly Competitive Market: In a perfectly competitive market, firms are price takers, meaning they have no control over the market price of their products. If Madam Malkin's can always sell a robe for the same price, it suggests that the firm is operating in a perfectly competitive sales market. ‖ ‖ b ⋮ Understanding Diminishing MPL: The diminishing marginal product of labor implies that as the firm hires more workers, each additional worker contributes less to total output than the previous one. This is a typical characteristic of all firms regardless of the market structure they are in. However, it does not provide information about the competitiveness of the labor market. ‖ ‖ c ⋮ Analyzing the Labor Market: Since the wage is set in the labor market, and there is no information suggesting that Madam Malkin's has any control over the wage rate, it is not possible to determine the competitiveness of the labor market based solely on the information given. ‖ ∻Answer∻ ⚹ (A) The firm sells in a perfectly competitive market, but we cannot determine the competitiveness of the labor market. ⚹ ∻Key Concept∻ ⚹ Perfectly Competitive Sales Market and Indeterminate Labor Market Competitiveness ⚹ ∻Explanation∻ ⚹ Madam Malkin's ability to sell robes at a constant price indicates a perfectly competitive sales market, but the information provided does not allow us to determine the competitiveness of the labor market. ⚹◊What impact would a perfectly competitive labor market have on the firm's production decisions in the scenario described⍭ Generate me a similar question◊

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