Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The firm maximizes its profits by ensuring that the cost of hiring each new worker is justified by the revenue they generate.
B
The firm reduces its profits because hiring beyond this point increases costs without increasing revenue.
C
The firm will incur losses as hiring workers does not impact overall revenue.
D
The firm may still operate at a loss since hiring decisions are based solely on fixed costs.
Understanding the Answer
Let's break down why this is correct
Answer
When a firm hires workers, it looks at how much extra money each new worker brings in, known as the marginal revenue product (MRP). The firm will keep hiring more workers until the money earned from the last worker hired equals the cost of hiring that worker, called the marginal factor cost (MFC). This balance ensures that the firm maximizes its profits because hiring more workers beyond this point would cost more than what they bring in. For example, if a company hires a worker for $20 an hour and that worker generates $20 in revenue, the firm is breaking even. Therefore, by hiring until MRP equals MFC, the firm is likely to maintain or increase its profitability.
Detailed Explanation
The firm makes the best choice when the money earned from each new worker matches what it costs to hire them. Other options are incorrect because Some might think that hiring more workers always costs more than it earns; It's a common mistake to believe that hiring workers doesn't help revenue.
Key Concepts
Marginal Revenue Product (MRP)
Marginal Factor Cost (MFC)
Profit Maximization
Topic
Labor Market Dynamics
Difficulty
easy level question
Cognitive Level
understand
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