Question

Firm XYZ produces and sells corn in a perfectly competitive market and hires its workers in a perfectly competitive labor market. Which of the following best describes the demand curve for XYZ's corn and XYZ's demand curve for labor?
answer choices
(A) Demand for XYZ’s Corn = Horizontal ; XYZ’s Labor Demand = Horizontal

(B) Demand for XYZ’s Corn = Horizontal ; XYZ’s Labor Demand = Downward Sloping

(C) Demand for XYZ’s Corn = Horizontal ; XYZ’s Labor Demand = Vertical

(D) Demand for XYZ’s Corn = Downward Sloping ; XYZ’s Labor Demand = Downward Sloping

Answer 1

Answer:

(B) Demand for XYZ’s Corn = Horizontal ; XYZ’s Labor Demand = Downward Sloping

Explanation:

If Firm XYZ produces and sells corn in a perfectly competitive market and hires its workers in a perfectly competitive labor market, the statement that best describes the demand curve for XYZ's corn and XYZ's demand curve for labor is: Demand for XYZ’s Corn = Horizontal ; XYZ’s Labor Demand = Downward Sloping.

In a perfectly competitive market for commodities, the demand curve is horizontal because demand is equal to average revenue and is also equal to marginal revenue.

However in the perfectly competitive labor market, the case is different because the wage rate is set by the industry not just one firm, and demand for factors of production such as labor has an inverse relationship with the wage rate.

Furthermore, the law diminishing returns affects the demand for labor because as the firm adds more and more worers, the marginal productivity of each will decline. Hence MP (marginal productivity) is less than AP (average productivity) which leads to a downward sloping demand curve