Question

Under perfect competition, the equilibrium price of labor used to produce cloth will be equal to:________________.A) the average product of labor in the production of cloth times the price of cloth.B) the slope of the production possibility frontier.C) the price of cloth divided by the marginal product of labor in the production of cloth.D) the marginal product of labor in the production of cloth times the price of cloth.

E) the ratio of the marginal product of labor in the production of cloth to the marginal product of labor in the production of food times the ratio of the price of cloth to the price of food.

Answer 1

A) the average product of labor in the production of cloth times the price of cloth.

Step-by-step explanation:

Under perfect competition, the equilibrium price of labor used to produce cloth will be equal to the average product of labor in the production of cloth times the price of cloth. This simply means that, in a perfectly competitive market, the amount of labor used to produce goods is equal to the price of the goods multiplied by the marginal product of labor used in producing those goods.

In a profit driven firm, labor are employed up to the extent where the market wage is the same as the demand for labor in a firm.

Hence, to determine a market wage in a competitive labor market, the interaction between the market demand for labor and market supply is employed by firms.