A profit-maximizing firm will employ a resource up to the point where
A)its marginal resource cost equals its marginal revenue product
B)its marginal resource cost equals its marginal product
C)its marginal resource cost equals the marginal revenue of the output
D)its marginal resource cost equals the price of the resource
E)the price of the resource equals the marginal revenue of the output

Question

Quizplus · Accepted Answer

A profit-maximizing firm will use a resource up to the point where its marginal resource cost (MRC) equals its marginal revenue product (MRP). The MRP is the additional revenue earned by the firm when it uses one more unit of the resource, while the MRC is the additional cost incurred by the firm when it uses one more unit of the resource. When MRP is greater than MRC, the firm can increase its profits by using more units of the resource. When MRP is less than MRC, the firm will decrease its usage of the resource. So, the point where MRP equals MRC is the equilibrium point where the firm maximizes its profits.

A Profit-Maximizing Firm Will Employ a Resource Up to the Point