5.3 Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

• What are traded in factor markets?

  Labor, capital, and land
• A perfectly competitive factor market assumes firms are price
• Perfectly competitive factor markets have many buyers and sellers.
• How do factor markets differ from product markets?

  Firms buy resources
• Match the market characteristic with its description:

  Items traded in product markets ↔️ Goods and services

  Participants in factor markets ↔️ Firms and resource suppliers
• In perfect competition, firms operate where $MRP$ equals the resource price
• Firms in a perfectly competitive factor market can influence resource prices.

  False
• What are the three primary resources traded in factor markets?

  Labor, capital, and land
• Firms in a perfectly competitive factor market are price
• Homogenous resources are identical and interchangeable in a perfectly competitive factor market.
• What is the law of diminishing marginal returns?

  Additional output eventually decreases
• The law of diminishing marginal returns states that adding more of a variable
• Fixed resources do not change with output in the law of diminishing marginal returns.
• What is the formula for marginal revenue product (MRP)?

  $MRP =$$MP \times MR$
• Match the metric with its definition:

  Marginal Product (MP) ↔️ Change in output from adding one unit of resource

  Marginal Revenue Product (MRP) ↔️ Change in revenue from adding one unit of resource
• Why does the law of diminishing marginal returns affect MRP?

  MP eventually declines
• Marginal Product (MP) is defined as the change in output from adding one unit of a resource
• How is Marginal Revenue Product (MRP) calculated?

  $MP \times MR$
• The law of diminishing marginal returns leads to a decreasing MRP, even if MR remains constant.
• Factor Markets are where resources like labor, capital, and land are bought and sold
• What are the key features of a perfectly competitive factor market?

  Price taking, many participants, homogenous resources, perfect mobility
• Match the market characteristic with its type:

  Goods and Services ↔️ Product Market

  Resources (labor, capital, land) ↔️ Factor Market
• In a perfectly competitive factor market, firms operate where MRP equals what?

  Resource Price
• The law of diminishing marginal returns states that additional output from each extra unit of variable resource eventually decreases
• What is an example of a fixed resource in the law of diminishing marginal returns?

  Oven in a bakery
• As the law of diminishing marginal returns takes effect, adding more variable resources will decrease both MP and MRP.
• Marginal Factor Cost (MFC) is the additional cost a firm incurs by employing one more unit of a resource
• Under perfect competition, what is the relationship between MFC and resource price?

  $MFC =$$P$
• How do firms maximize profit in factor markets?

  $MRP =$$MFC$
• Steps to determine the profit-maximizing quantity of a factor:

  1️⃣ Calculate MRP using MP × MR

  2️⃣ Determine MFC, typically equal to the resource price under perfect competition

  3️⃣ Set MRP equal to MFC

  4️⃣ Solve for the quantity of the factor
• The MRP curve is the firm's demand curve for the factor.
• Profit maximization occurs when MRP equals MFC
• What is the formula for MRP?

  MP \times MR</latex>
• The MRP curve is the firm's demand curve for the factor.
• MFC is typically equal to the resource price
• What are the three examples of resources in factor markets?

  Labor, capital, land
• Order the characteristics of a perfectly competitive factor market:

  1️⃣ Price Taking

  2️⃣ Many Participants

  3️⃣ Homogenous Resources

  4️⃣ Perfect Mobility
• What is the law of diminishing marginal returns?

  Output decreases with variable resources
• Marginal Product = \frac{\Delta Output}{\Delta Variable Resource}</latex>Resource
• The law of diminishing marginal returns applies when variable resources are added to fixed resources.