Suppose a firm sells a good for a perfectly competitive price of $5. The equilibrium wage rate is $10. The first worker it hires produces five units. Two workers produce a total of nine units. Given this information, the firm will:
A) hire the first worker only.
B) hire both the first and second workers.
C) not hire either worker.
D) hire only the second worker.

Question

Quizplus · Accepted Answer

The firm will hire both workers because the marginal revenue product of labor (MRPL) is greater than the wage rate. The MRPL is the additional revenue generated by hiring an additional worker. In this case, the MRPL of the first worker is $5 (5 units x $1 price), and the MRPL of the second worker is $4 (4 units x $1 price). Since the MRPL is greater than the wage rate, the firm will hire both workers.

Suppose a Firm Sells a Good for a Perfectly Competitive