📚 Learning Guide
Labor Market Dynamics
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Arrange the following steps in the correct order for a firm to determine the optimal number of workers to hire in a perfectly competitive labor market?

Master this concept with our detailed explanation and step-by-step learning approach

Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
Learn Explanation
4
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Choose the Best Answer

A

Calculate the Marginal Revenue Product (MRP) of each additional worker.

B

Compare the MRP to the Marginal Factor Cost (MFC) of hiring the worker.

C

Hire workers until MRP equals MFC.

D

Assess potential changes in market demand for the product.

Understanding the Answer

Let's break down why this is correct

Answer

To determine the optimal number of workers to hire in a perfectly competitive labor market, a firm first needs to understand the demand for its product and how hiring more workers affects its production. Next, it calculates the marginal product of labor, which is the additional output produced by hiring one more worker. The firm then compares the marginal cost of hiring an additional worker, which is typically the wage paid, to the marginal revenue generated from the additional output. When the marginal revenue equals the marginal cost, the firm knows it has found the optimal number of workers to hire. For example, if hiring one more worker increases production enough to cover their wage and adds to profit, then that is a good decision for the firm.

Detailed Explanation

First, a firm needs to find out how much extra money each new worker can bring in. Other options are incorrect because Some might think comparing MRP to the cost of hiring is the first step; People might believe that hiring workers until MRP equals the cost is the first action.

Key Concepts

Marginal Revenue Product (MRP)
Marginal Factor Cost (MFC)
Labor Market Equilibrium
Topic

Labor Market Dynamics

Difficulty

medium level question

Cognitive Level

understand

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