Suppose that a firm sells a good for a perfectly competitive price of $5.The equilibrium wage rate is $10.The first worker it hires produces five units.Two workers produce a total of nine units.Given this information,the firm will:
A)hire the first worker only.
B)hire both the first and second workers.
C)not hire either worker.
D)hire only the second worker.

Question

Quizplus · Accepted Answer

The marginal product of labor (MPL) for the first worker is 5 units, meaning that the first worker adds 5 units of output to the firm. The additional output of the second worker is only 4 units (9-5), so his/her MPL is 4.

To determine whether or not to hire each worker, the firm compares the worker's MPL to their wage rate (in this case, $10). If their MPL is greater than or equal to $10, the firm hires the worker. If their MPL is less than $10, the firm does not hire the worker as the additional cost of the wage would exceed the additional revenue generated from the worker's output.

Both workers' MPLs are greater than $10, so both would be hired. Therefore, the best choice is option B: hire both workers.

Suppose That a Firm Sells a Good for a Perfectly