A profit maximizing firm that is a price taker in both product and factor markets will hire a factor up to the point at which

Question

Quizplus · Accepted Answer

A profit-maximizing firm in a competitive market will hire additional units of a factor until the value of the marginal product (VMP) of the last unit hired equals the factor's cost. The VMP is the additional revenue the firm earns from hiring one more unit of the factor, which is equivalent to the marginal product of the factor times the price of the output (thus, it's the marginal revenue product, MRP). Since the firm is a price taker in both product and factor markets, the condition for profit maximization is when the MRP equals the wage rate (or the cost of the factor). Therefore, all the statements A, B, and C describe the same condition using different terminologies, making D correct.

A Profit Maximizing Firm That Is a Price Taker in Both