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Macroeconomics
Posted 3 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 an imperfectly competitive market.
(B) The firm sells in an imperfectly competitive market and hires labor in a perfectly competitive 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 a perfectly competitive market, but we cannot determine the competitiveness of the labor market.
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Answer from Sia
Posted 3 months ago
Solution
a
Understanding MPL: The marginal product of labor (MPL) represents the additional output produced by hiring one more worker. If the value of MPL decreases as more workers are hired, this suggests diminishing marginal returns, which is typical in all market structures
b
Product Market Analysis: Since the firm can always sell a robe for the same price, this indicates that the firm is a price taker, which is characteristic of a perfectly competitive market. In such markets, firms have no control over the price and must accept the market price
c
Labor Market Analysis: The wage the firm pays is set in the labor market. If the firm has no control over the wage rate, it suggests that the labor market is perfectly competitive. However, the information given does not explicitly confirm the competitiveness of the labor market
d
Market Structure Determination: Based on the information that the firm can sell robes at a constant price, we can conclude that the product market is perfectly competitive. The labor market structure is not clearly defined, but the firm's ability to hire at the market wage suggests it is likely perfectly competitive as well
Answer
(D) The firm sells in a perfectly competitive market and hires labor in a perfectly competitive market.
Key Concept
Perfectly Competitive Market
Explanation
The firm is a price taker in the product market, indicating a perfectly competitive market. The wage being set in the labor market suggests that it is also perfectly competitive, although this is less certain without additional information.

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