You have been hired by the No Hassle Collection Agency to provide economic advice. The owner of the agency tells you that No Hassle's only variable input is the number of collection agents. The hourly wage for collection agents is $30.00. The marginal revenue product curve for collection agents reaches its maximum at five workers with a marginal revenue product of $34.00. What advice would you give this firm?
A) Hire five collection so as to maximize profits.
B) Shut down immediately, as the firm is not able to cover all of its variable costs.
C) Decrease the wage rate paid to collection agents so that their marginal revenue product will decrease.
D) Hire collection agents until the marginal revenue product is equal to the wage-which will occur when more than five agents are employed.

Question

Quizplus · Accepted Answer

The advice to hire collection agents until the marginal revenue product (MRP) equals the wage rate is based on the principle that firms maximize profit by employing resources up to the point where the MRP equals the marginal resource cost (MRC), in this case, the wage rate. Since the MRP of $34.00 at five workers is higher than the wage rate of $30.00, hiring more agents until MRP equals the wage will increase profits.

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