Liu's Potato Chips is a perfectly competitive firm currently employing 30 workers. The marginal revenue product of the 30th worker is $7.00 per hour. The wage rate is $8.00 per hour. To increase profits, this firm should
A) decrease employment until the MRP of labor equals $8.00.
B) increase employment until the MRP of labor equals $8.00.
C) continue hiring 30 workers because the firm earns a surplus of $1.00 on each worker hired.
D) increase the price of potato chips so that the marginal revenue product increases to $8.00 per hour.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, a firm maximizes profit by hiring workers up to the point where the marginal revenue product (MRP) of labor equals the wage rate. Since the MRP of the 30th worker ($7.00) is less than the wage rate ($8.00), the firm should decrease employment to increase profits, making the MRP of labor equal to $8.00.

Liu's Potato Chips Is a Perfectly Competitive Firm Currently Employing