Question

CeilingFan is a company that sells fans and hires labour. The company is in a perfectly competitive situation with respect to the fans it sells and the labour that it hires. Based on this, we can say that: A. CeilingFan’s labour demand curve will be vertical at the current level of employment. B. All of the other answers are incorrect C. CeilingFan’s labour demand curve will be upward sloping. D. CeilingFan’s labour demand curve will be downward sloping. E. CeilingFan’s labour demand curve will be horizontal at the minimum wage rate

Answer 1

In perfect competition, firm will employ the labour upto the point at which Real Wage rate is equal to the Marginal Product of Labour. Now, as the Employment of labour is Increased, the Marginal Product of Labour decreases due to the law of diminishing returns to a factor. Now, since real wage rate equals Marginal Product of Labour in perfect competition, as the Employment of labour increases, the real wage rate (and Marginal Product of Labour) would Decrease. This negative relationship between the real wage rate and the Quantity of labour employed gives the negatively sloped Labour demand curve for this firm.

Therefore, CeilingFan's labour demand curve would be downward sloping.

Hence, Option D is correct.