This table shows the short run production function for a competitive firm whos o
ID: 1239655 • Letter: T
Question
This table shows the short run production function for a competitive firm whos output sells for $20 a unit.L Q
0 0
1 2
2 6
3 9
4 11
5 12
Consider a firm with the same production function of $20 output price when 2 units of output are produced but operating under imperfect competition in the product market. Explain how and why the firms demand curve for labor will compare to that of the firms operating in a competitive product market, and the consequences for the firms employment of labor. No graphs or calculations are needed.
Explanation / Answer
In addition to making output and pricing decisions, firms must also determine how much of each input to demand. Firms may choose to demand many different kinds of inputs. The two most common are labor and capital. The demand and supply of labor are determined in the labor market. The participants in the labor market are workers and firms. Workers supply labor to firms in exchange for wages. Firms demand labor from workers in exchange for wages. The firm's demand for labor. The firm's demand for labor is a derived demand; it is derived from the demand for the firm's output. If demand for the firm's output increases, the firm will demand more labor and will hire more workers. If demand for the firm's output falls, the firm will demand less labor and will reduce its work force. Marginal revenue product of labor. When the firm knows the level of demand for its output, it determines how much labor to demand by looking at the marginal revenue product of labor. The marginal revenue product of labor (or any input) is the additional revenue the firm earns by employing one more unit of labor. The marginal revenue product of labor is related to the marginal product of labor. In a perfectly competitive market, the firm's marginal revenue product of labor is the value of the marginal product of labor. The demand and supply of labor are determined in the labor market. The participants in the labor market are workers and firms. Workers supply labor to firms in exchange for wages. Firms demand labor from workers in exchange for wages. The firm's demand for labor. The firm's demand for labor is a derived demand; it is derived from the demand for the firm's output. If demand for the firm's output increases, the firm will demand more labor and will hire more workers. If demand for the firm's output falls, the firm will demand less labor and will reduce its work force. Marginal revenue product of labor. When the firm knows the level of demand for its output, it determines how much labor to demand by looking at the marginal revenue product of labor. The marginal revenue product of labor (or any input) is the additional revenue the firm earns by employing one more unit of labor. The marginal revenue product of labor is related to the marginal product of labor. In a perfectly competitive market, the firm's marginal revenue product of labor is the value of the marginal product of labor.
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