Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
By hiring workers until the marginal cost of labor equals the marginal productivity of labor
B
By hiring workers until the total cost of labor equals total revenue
C
By hiring workers until the average cost of labor is minimized
D
By hiring workers based solely on the going wage rate in the market
Understanding the Answer
Let's break down why this is correct
Answer
In a competitive labor market, a firm determines the optimal number of workers to hire by comparing the additional revenue generated by each worker, known as the marginal revenue product of labor, to the wage it must pay that worker. When the extra money earned from hiring one more worker is greater than the wage, the firm should hire that worker because it increases profit. However, if the wage is higher than the extra revenue the worker brings in, the firm should not hire more workers as it would decrease profit. For example, if a firm pays $15 per hour for a worker but that worker generates $20 per hour in sales, hiring that worker is beneficial. The firm continues to hire until the point where the cost of hiring an additional worker equals the revenue that worker generates.
Detailed Explanation
A firm hires workers until the extra cost of hiring one more worker is equal to the extra output they produce. Other options are incorrect because This answer suggests hiring until total costs match total revenue; Minimizing average costs doesn't guarantee profit.
Key Concepts
labor demand
marginal productivity
Topic
Profit Maximization in Labor Markets
Difficulty
medium level question
Cognitive Level
understand
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