Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Profits will decrease due to diminishing returns.
B
Profits will increase because more workers produce more output.
C
Profits will remain unchanged because output levels stabilize.
D
Profits will increase until all workers are fully utilized.
Understanding the Answer
Let's break down why this is correct
Answer
When Lead Mill hires more workers than the point where the marginal revenue product of labor (MRPL) equals the marginal factor cost (MFC), it can lead to lower profits. This is because beyond this point, the additional revenue generated by hiring one more worker is less than the cost of hiring that worker. For example, if hiring an extra worker costs $20, but that worker only produces $15 worth of additional output, the company loses $5 for each extra worker. Therefore, if Lead Mill continues to hire beyond this balance, its overall profits will decrease, as the costs will outweigh the benefits of production. To maximize profits, it is essential for the company to stop hiring when MRPL equals MFC.
Detailed Explanation
When a company hires too many workers, each new worker adds less value. Other options are incorrect because Some might think more workers always mean more output; It's a common belief that adding workers won't change profits.
Key Concepts
Marginal Revenue Product of Labor (MRPL)
Marginal Factor Cost (MFC)
Diminishing Returns
Topic
Profit Maximization in Labor Markets
Difficulty
easy level question
Cognitive Level
understand
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