If both input and output markets are competitive and firms are profit maximizing, then in equilibrium each factor of production earns ?
Correct answer: D. the value of its marginal product
- A. an amount equal to the price of output times total output
- B. the amount allocated by the political process
- C. an equal share of output
- D. the value of its marginal product
Explanation
With competitive input and output markets, a profit-maximizing firm hires each factor until its factor price equals its value of marginal product. Hence each factor earns the value of the output generated by its last unit.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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