Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Firms will continue hiring workers as long as MRP exceeds MFC.
B
MRP is determined solely by the wage paid to workers.
C
At the profit-maximizing level of employment, MRP equals MFC.
D
If MRP falls below MFC, firms should reduce their workforce.
E
The MFC increases as more workers are hired due to diminishing returns.
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive labor market, the marginal revenue product (MRP) of labor is the additional revenue a firm earns from hiring one more worker. The marginal factor cost (MFC) is the additional cost incurred by hiring that extra worker, usually equal to the wage paid. A key idea is that firms will hire workers until the MRP equals the MFC; this means they will keep hiring as long as the revenue generated by an extra worker is greater than or equal to the cost of hiring that worker. For example, if a company finds that hiring one more worker increases its revenue by $100, but the wage for that worker is $90, it will hire that worker because the MRP exceeds the MFC. Thus, in this market, firms balance hiring decisions based on the comparison of MRP and MFC.
Detailed Explanation
In a perfectly competitive labor market, MRP and MFC have specific relationships that are not accurately described in any of the options. Other options are incorrect because This suggests firms will always hire if MRP is higher than MFC; MRP is influenced by how much extra money a worker brings in, not just their wage.
Key Concepts
Marginal Revenue Product (MRP)
Marginal Factor Cost (MFC)
Perfectly Competitive Market
Topic
Labor Market Dynamics
Difficulty
medium level question
Cognitive Level
understand
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