Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Decrease the number of workers to reduce costs
B
Increase the number of workers to take advantage of higher MRP
C
Maintain the current level of employment as it is optimal
D
Increase wages to reduce turnover and improve productivity
Understanding the Answer
Let's break down why this is correct
Answer
When a firm finds that its marginal revenue product (MRP) of labor is higher than the marginal factor cost (MFC), it means that each additional worker is generating more revenue than it costs to hire them. To maximize profits, the firm should consider hiring more workers. This is because the extra revenue produced by each new worker exceeds the cost of employing them, leading to increased overall profit. For example, if hiring one more employee costs $1,000 but that employee brings in $1,500 in revenue, the firm gains an extra $500 in profit. Therefore, continuing to hire until MRP equals MFC is a smart strategy for maximizing profits.
Detailed Explanation
When the MRP is higher than the MFC, it means the firm earns more from each worker than it pays them. Other options are incorrect because Some might think cutting workers saves money; Staying the same might seem safe, but it misses the chance to earn more.
Key Concepts
Profit Maximization in Labor Markets
Marginal Revenue Product
Marginal Factor Cost
Topic
Profit Maximization in Labor Markets
Difficulty
hard level question
Cognitive Level
understand
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