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Understanding the Answer
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Answer
When a firm discovers that the marginal product of labor is greater than the marginal product of capital, it means that each additional worker is adding more value to the firm's output than each additional machine. This situation suggests that hiring more workers can lead to higher productivity and profits without needing to invest in expensive machinery. For example, if a factory finds that one more worker can produce 10 additional units of a product, while a new machine only adds 5 units, it makes sense to hire that worker instead. However, while this is a good guideline, the firm should also consider other factors, like the long-term costs of labor versus machinery and how many workers can be effectively managed. Therefore, while hiring more workers is often beneficial in this situation, it is important for the firm to evaluate all aspects before making a decision.
Detailed Explanation
Just because labor seems more productive now doesn't mean it's always the best choice. Other options are incorrect because This answer assumes that hiring more workers is always better.
Key Concepts
Cost Minimization
Marginal Product
Resource Allocation
Topic
Cost Minimization in Firms
Difficulty
medium level question
Cognitive Level
understand
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