Question

For a firm hiring labor in a perfectly competitive labor market, the marginal revenue product curve slopes downward after some point because as more of a factor is employed, which of the following declines? Your answer: a) Marginal product b) Marginal factor cost c) Marginal cost d) Total output e) Wage rates.

Answer 1

Answer:

The correct answer is option a.

Explanation:

In a perfectly competitive labor market, after some point, the marginal revenue product derived from hiring an additional worker starts declining. This causes the marginal revenue curve to slope downward after a certain point.  

This happens because of diminishing marginal returns. The law of diminishing marginal returns states that keeping other things constant if we keep increasing a variable factor, after certain the marginal returns from each additional unit will start declining.