A profit-maximizing firm will select all inputs so that the marginal revenue product is equal to the price of the input.

Question

Quizplus · Accepted Answer

This is the standard profit-maximizing rule for input selection in a perfectly competitive market. When the marginal revenue product of an input (the additional revenue generated by using one more unit of that input) is equal to the price of the input, the firm is getting the most value out of that input and any further use of the input would result in less added value than the cost of the input. Therefore, the profit-maximizing firm will only use inputs up to the point where their marginal revenue product equals their price.

A Profit-Maximizing Firm Will Select All Inputs So That the Marginal