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Q. State whether the following statements are true or false. Shortly explain your answer in 1-2 sentences.

a) If firms are perfectly competitive, firms face an upward sloping labor supply curve.

b) In the long run the firm chooses the optimal level of output by setting MC=p (i.e. the marginal cost of production equal to the output price).

c) In a monopsony with a non-discriminating monopsonist the labor supply curve equals the marginal cost of labor.

d) IT workers and computers are (perfect) substitutes in production.

Answer 1

a)

In a perfectly competitive setup, the firm's labor supply curve is perfectly elastic (horizontal line). Each firm is a wage-taker and the wages are determined by the industry.

So, statement is FALSE

b)

In the long run, below is the equilibrium condition:

P = MC

Every firm in the industry earns normal profit in the long run

So, statement is TRUE

c)

In a monoposony (single buyer market), the supply curve of labor = average cost of labor

It is not equal to MC. So, statement is FALSE

d)

IT workers and Computers are complements of each other since both needs to be combined to achieve the desired results. They are not substitutes of each other.

So, statement is FALSE

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