Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Hire more workers to increase overall production
B
Reduce the number of workers to maximize profits
C
Keep hiring at the same rate to maintain current output
D
Increase wages to attract higher-quality labor
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive labor market, if a firm's marginal revenue product of labor is less than the wage rate, it means that the value generated by each additional worker is less than what the firm pays them. This situation suggests that hiring more workers is not profitable for the firm, as they are not bringing in enough revenue to cover their wages. To respond to this, the firm should consider reducing the number of workers or stopping the hiring of new workers until the marginal revenue product increases. For example, if a firm pays a worker $20 an hour but finds that the extra output from that worker only generates $15 in revenue, it would be wise for the firm to either cut back on hiring or look for ways to improve productivity. This helps the firm maximize its profits by ensuring that the cost of labor aligns with the revenue generated.
Detailed Explanation
If the extra money made from hiring one more worker is less than what you pay them, you lose money. Other options are incorrect because Some might think hiring more workers will always help; Keeping the same number of workers might seem safe, but if they aren't making enough money, you're still losing out.
Key Concepts
Marginal Product of Labor
Marginal Factor Cost
Profit Maximization
Topic
Marginal Product and Labor Costs
Difficulty
medium level question
Cognitive Level
understand
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