A firm's most profitable level of a factor of production hired in a perfectly competitive market occurs at a point at which there is equality between the:
A) total cost and total revenue curves.
B) marginal factor cost and product demand curves.
C) marginal factor cost and marginal revenue product curves.
D) average factor cost and marginal revenue product curves.

Question

Quizplus · Accepted Answer

The most profitable level of a factor of production is where a firm maximizes its profit, which occurs at the output level where the marginal factor cost (MFC) equals the marginal revenue product (MRP). The MFC is the additional cost of hiring one more unit of a factor of production (in this case, labor), while the MRP is the additional revenue (or output) generated by hiring that additional unit. At the point where MFC = MRP, the firm is able to hire the quantity of labor that generates the highest profit, since any more or less would decrease its profit. Therefore, the correct choice is C, where the marginal factor cost and marginal revenue product curves are equal.

A Firm's Most Profitable Level of a Factor of Production