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Question & Answer
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A firm hires more workers until the cost of labor exceeds the additional output produced.
A firm continues to invest in capital until the marginal product of capital equals its cost.
A firm reduces production to save costs, even if it leads to lower total revenue.
A firm maintains its current labor force despite decreasing demand for its product.
Understanding the Answer
Let's break down why this is correct
The firm stops buying more capital when the extra output from one more unit equals its price. Other options are incorrect because Hiring workers beyond the point where each worker adds less output increases wage costs that are not covered by new sales; Reducing production cuts costs but also cuts revenue.
Key Concepts
Profit Maximization
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Deep Dive: Profit Maximization
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Definition
Profit maximization involves firms optimizing their resource allocation to achieve the highest level of profit. This process includes comparing the marginal revenue product of labor and capital to their respective prices, aiming for both ratios to be equal to one for optimal resource utilization.
Topic Definition
Profit maximization involves firms optimizing their resource allocation to achieve the highest level of profit. This process includes comparing the marginal revenue product of labor and capital to their respective prices, aiming for both ratios to be equal to one for optimal resource utilization.
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