A profit-maximizing firm will hire extra units of a resource when
A)marginal resource cost exceeds marginal revenue product
B)marginal resource cost is equal to marginal revenue product
C)marginal resource cost is less than marginal revenue product
D)temporary resource price differentials exceed the marginal resource cost
E)the average resource cost and marginal resource cost curves are equal

Question

Quizplus · Accepted Answer

A profit-maximizing firm will hire extra units of a resource when marginal resource cost is less than marginal revenue product. This is because the firm wants to increase its profits by hiring more of the resource if the extra revenue generated from the new hire is greater than the cost of the new hire (i.e. marginal revenue product is greater than marginal cost). If the cost of the new hire is greater than the revenue generated (i.e. marginal resource cost exceeds marginal revenue product), then the firm would not want to hire the additional resource as it would decrease profits. Therefore, option C is the correct choice.

A Profit-Maximizing Firm Will Hire Extra Units of a Resource