The labor demand curve in a perfectly competitive factor market is the sum of all firms':
A) marginal product curves.
B) marginal revenue product curves.
C) marginal physical product curves.
D) average physical product curves.

Question

Quizplus · Accepted Answer

The labor demand curve in a perfectly competitive factor market is the sum of all firms' marginal revenue product curves. This is because in a perfectly competitive market, each firm is a price taker and faces a horizontal demand curve for its output. Therefore, the marginal revenue product (MRP) of labor for each firm is equal to the value of the marginal product (MP) of labor (the additional output produced by an additional unit of labor) multiplied by the price of the output. Since the price is constant for each firm, the MRP curve is upward-sloping and represents the additional revenue generated by hiring one more unit of labor. The labor demand curve is found by horizontally summing the MRP curves of all firms in the industry.

The Labor Demand Curve in a Perfectly Competitive Factor Market