Learning Path
Question & Answer
Choose the Best Answer
Yes, because the marginal product of labor exceeds the wage
No, because the marginal product of capital exceeds the price
Yes, because the ratios of marginal products to prices are equal
No, because the additional cost of labor will not increase profits
Understanding the Answer
Let's break down why this is correct
The firm hires when the extra output from one more worker, 30 units, is worth more than the worker’s cost, 10 dollars. Other options are incorrect because The decision to hire labor depends only on labor’s numbers, not on capital’s numbers; The rule is not about equal ratios.
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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