If an insurance company hires a resource in a perfectly competitive resource market and it wants to maximize profit, it will hire where marginal revenue product equals
A)the price of the resource, which equals its marginal resource cost
B)the price of the resource, which is greater than its marginal resource cost
C)the price of the resource, which is less than its marginal resource cost
D)marginal product
E)the price of the product

Question

Quizplus · Accepted Answer

In a perfectly competitive resource market, the price of the resource is determined by the market supply and demand. Therefore, the insurance company should hire where the marginal revenue product (MRP) equals the price of the resource, which is also equal to its marginal resource cost (MRC). This is because hiring any additional unit of the resource beyond this point would lead to a decrease in profit since the MRC would exceed the MRP. Therefore, the optimal hiring decision for the insurance company is to hire the units of the resource up to the point where MRP = MRC = Price.

If an Insurance Company Hires a Resource in a Perfectly