Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Hire more labor and reduce capital
B
Hire more capital and reduce labor
C
Maintain current resource levels
D
Increase prices to match labor's MRP
Understanding the Answer
Let's break down why this is correct
Answer
To maximize profit, the firm should allocate more resources to labor instead of capital since the marginal revenue product of labor is higher. This means that each additional worker brings in more revenue compared to each additional unit of capital. For example, if hiring one more worker increases revenue by $100, but adding another machine only increases it by $50, the firm is better off hiring the worker. By focusing on labor, the firm can increase its overall revenue and profit. Therefore, the firm should adjust its resources accordingly to take advantage of the higher productivity from labor.
Detailed Explanation
The firm should hire more workers and use less capital. Other options are incorrect because Some might think that increasing capital will help profits; Maintaining current levels may seem safe, but it misses the chance to increase profits.
Key Concepts
Resource Allocation for Profit Maximization
Marginal Revenue Product
Optimal Resource Use
Topic
Resource Allocation for Profit Maximization
Difficulty
easy level question
Cognitive Level
understand
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