Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Hire until the marginal revenue product equals the marginal factor cost
B
Hire based on the total cost of all workers
C
Hire as many workers as possible regardless of MRP
D
Hire until total revenue is maximized regardless of costs
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive labor market, a firm should consider the relationship between the wage it pays and the productivity of the workers it hires. The firm wants to hire workers until the point where the cost of hiring an additional worker, known as the wage, is equal to the additional output that worker produces, called the marginal product. For example, if a firm pays $15 an hour and finds that hiring one more worker increases production by enough to earn an extra $15, it makes sense to hire that worker. However, if the extra worker only adds $10 worth of output, the firm should not hire them because they would lose money. Therefore, balancing the wage against the productivity of workers helps the firm maximize its profits while making efficient hiring decisions.
Detailed Explanation
A firm should hire workers until the extra money made from hiring one more worker equals the cost of that worker. Other options are incorrect because Focusing only on the total cost of all workers can be misleading; Hiring as many workers as possible without thinking about their value can waste money.
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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