Question

. Suppose a factor price taker purchases one unit of factor X for $10. At what price would it purchase the second unit, and what would marginal factor cost (MFC) equal?

1. It would purchase the second unit for $10, and MFC equals $10.
2. There is not enough information to know what it would purchase the second unit for, and thus we do not know what MFC equals.
3. It would purchase the second unit for $10, but there is not enough information to know what MFC equals.
4. There is not enough information to know what it would purchase the second unit for, but MFC equals $10.

Answer 1

Option A is correct - It would purchase the second unit for $10, and MFC equals $10.

A firm operating under a perfectly competitive market for the factors is a price taker. This is because there are so many firms that want to hire the same workers that the impact of one single firm does not change the prices of the factor purchased. Thus all firms are price takers and the prices of the factor are decided by the market conditions and they are the same for all the factors purchased. Thus, no matter how many factors are purchased in this market it will cost the same to the firm.

From the above explanation we can see that if the unit of one factor costs $10 then, the price of the second unit of factor purchased will be $10 too.

Now, MFC (marginal factor cost) is defined as the additional cost incurred from hiring one extra unit of factor or increment in the total cost from an extra unit of factor purchased. Since all factors are purchased at the same price, the MFC will be $10 too.

Suppose, the first unit is purchased at $10 which makes the total cost $10 for one unit purchased. Now, second unit is also purchased at $!0, which will make the total cost for 2 units = $10+$10 = $20.

Now, the additional cost incurred for hiring an extra unit of factor = 20-10 = $10

Thus MFC will be $10 for this market.