Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
If the marginal revenue product of labor exceeds the wage rate, the firm should hire more workers.
B
If the marginal revenue product of labor is less than the wage rate, the firm should hire more workers.
C
The marginal revenue product of labor has no impact on employment levels.
D
Employment levels are solely determined by the firm’s capital stock.
Understanding the Answer
Let's break down why this is correct
Answer
In a firm where labor and capital can be used in place of each other, the marginal revenue product of labor (MRP) plays a crucial role in deciding how many workers to hire. The MRP measures the additional revenue generated by employing one more worker. If the MRP of labor is higher than the wage the firm has to pay, it makes sense for the firm to hire more workers because they will contribute more to the firm's earnings than they cost. For example, if hiring one more worker increases the firm's revenue by $100 while the wage is $80, the firm benefits by $20. Therefore, the firm will continue to hire additional workers until the MRP equals the wage, as this balance maximizes profits.
Detailed Explanation
When the extra money made from hiring a worker is more than what you pay them, it makes sense to hire more. Other options are incorrect because This idea suggests hiring when workers cost more than they earn; This option ignores how valuable workers are.
Key Concepts
Firm Decision-Making
Input Substitutability
Employment Levels
Topic
Calculating Marginal Revenue Product
Difficulty
hard level question
Cognitive Level
understand
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