Ernie's Sushi-On-A-Stick is a perfectly competitive firm currently employing 75 workers. The marginal revenue product of the 75th worker is $9.00 per hour. The wage rate is $12.00 per hour. To increase profits, this firm should
A) decrease employment until the MRP of labor equals $12.00.
B) increase employment until the MRP of labor equals $12.00.
C) continue hiring 75 workers because the firm earns a surplus of $3.00 on each worker hired.
D) increase the price of sushi-on-a-stick so that the marginal revenue product increases to $12.00 per hour.

Question

Quizplus · Accepted Answer

The firm should decrease employment until the marginal revenue product (MRP) of labor equals the wage rate ($12.00). Currently, the MRP of the 75th worker is $9.00, which is less than the wage rate of $12.00, indicating that the cost of hiring the last worker is more than the revenue they generate. Reducing the number of workers will increase the MRP of the remaining workers towards $12.00, aligning labor costs with revenue generated per worker.

Ernie's Sushi-On-A-Stick Is a Perfectly Competitive Firm Currently Employing 75