Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
MRP is greater than the wage
B
MRP is equal to the wage
C
MRP is less than the wage
D
MRP is irrelevant to wages
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive market, when a firm is maximizing profit, the Marginal Revenue Product (MRP) of labor is equal to the wage paid to workers. MRP is the additional revenue that a firm earns from hiring one more worker. If the firm pays a wage lower than the MRP, it can increase profits by hiring more workers since each worker adds more to revenue than their cost. Conversely, if the wage is higher than the MRP, the firm would lose money on each additional worker and should reduce its workforce. For example, if a firm pays a worker $15 an hour and that worker generates $15 in additional revenue, the firm is in a good position to maximize profit.
Detailed Explanation
When a firm is maximizing profit, the MRP of labor is equal to the wage. Other options are incorrect because Some might think that MRP is greater than the wage, believing firms always earn more than they pay; It's a common mistake to think MRP is less than the wage.
Key Concepts
Marginal Revenue Product
Market Structures
Rent and Economic Profit.
Topic
Marginal Revenue Product Analysis
Difficulty
hard level question
Cognitive Level
understand
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