If a firm's marginal physical product is 5, and it sells its product for $60, and a unit of labor costs $200, the firm should
A)increase the use of labor.
B)decrease the use of labor.
C)decrease the price of the product.
D)reduce output of the product.

Question

Quizplus · Accepted Answer

The firm's marginal revenue product (MRP) can be calculated by multiplying the marginal physical product (MPP) by the price of the product. MRP = MPP x Price = 5 x $60 = $300. If a unit of labor costs $200, then the firm is earning a positive MRP of $100 ($300 - $200) for each unit of labor hired. Therefore, the firm should increase the use of labor to maximize profits as long as the MRP of labor remains positive.

If a Firm's Marginal Physical Product Is 5, and It