Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The firm should hire more workers to maximize profits
B
The firm should reduce the number of workers
C
The firm is at optimal hiring levels
D
The firm should increase wages for current workers
Understanding the Answer
Let's break down why this is correct
Answer
When a firm's marginal revenue product (MRP) exceeds its marginal factor cost (MFC), it means that the additional revenue generated by hiring one more worker is greater than the cost of hiring that worker. This situation encourages the firm to hire more employees because it can increase its profits by doing so. For example, if hiring an extra worker costs the firm $500, but that worker is expected to bring in $800 in revenue, the firm will benefit by hiring them. As long as the MRP remains higher than the MFC, the firm will continue to increase hiring until the two values are equal. Ultimately, this decision helps the firm maximize its profits by ensuring that each additional worker adds more value than they cost.
Detailed Explanation
When the extra money a worker brings in is more than what it costs to hire them, the firm can make more profit by hiring more workers. Other options are incorrect because Some might think that if costs are high, the firm should hire fewer workers; People might believe that if the firm is making money, they are hiring the right amount.
Key Concepts
Profit Maximization in Labor Markets
Marginal Revenue Product
Marginal Factor Cost
Topic
Profit Maximization in Labor Markets
Difficulty
easy level question
Cognitive Level
understand
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