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Profit Maximization
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To achieve profit maximization, a firm should adjust its resource allocation until the _______ of labor divided by the wage is equal to the _______ of capital divided by the price of capital.

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Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
Learn Explanation
4
Explore Topic

Choose AnswerChoose the Best Answer

A

marginal product

B

total product

C

average product

D

fixed cost

Understanding the Answer

Let's break down why this is correct

The firm wants each dollar spent on labor to add the same amount of output as each dollar spent on capital. Other options are incorrect because Total product is the overall amount of goods produced, not the change from adding a new unit; Average product looks at output per input unit, but it ignores how much extra output a new unit gives.

Key Concepts

Profit Maximization
Resource Allocation
Marginal Analysis
Topic

Profit Maximization

Difficulty

medium level question

Cognitive Level

understand

Deep Dive: Profit Maximization

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Definition
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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