PRD-4.C—a. Define (using graphs as appropriate) the characteristics of perfectly competitive factor markets. b. Explain (using graphs…

a. Define (using graphs as appropriate) the characteristics of perfectly competitive factor markets. b. Explain (using graphs where appropriate) the profit-maximizing behavior of firms buying labor (with other inputs fixed) in perfectly competitive markets. c. Calculate (using data from a graph or table where appropriate) measures representing the profit-maximizing behavior of firms buying labor (with other inputs fixed) in perfectly competitive markets.

• In a perfectly competitive labor market, the wage is set by the market and each firm hires the quantity of workers, where the marginal factor (resource) cost (wage) equals the marginal revenue product of labor. A typical firm may be a perfect competitor in the labor market even if it is an imperfect competitor in its output markets.
• A typical firm hires labor in a perfectly competitive labor market as long as the marginal revenue product of labor is greater than the market wage.
• To minimize costs or maximize profits, firms allocate inputs such that the last dollar spent on each input yields the same amount of marginal product.
• Marginal revenue product of a factor of production is the change in total revenue divided by the change in that factor of production, which is also equal to the marginal physical product of that factor multiplied by the marginal revenue (MRP = MP × MR). Firms in a perfectly competitive output market will have marginal revenue product of labor that is equal to the value of the marginal product of labor (VMPL = MPL × P) because marginal revenue for each unit of output is equal to price.
• Enduring understanding PRD-4: Factor prices provide incentives and convey information to firms and factors of production.