Suppose a firm is operating in a competitive product market with competitive factor markets.Further, assume labour is the firm's only factor of production.Which of the following conditions will ensure the firm is maximising profit? (Let P be the price of the good, MPL the marginal product of labour, W the wage rate, and MR the marginal revenue of the good.)

Question

Quizplus · Accepted Answer

In a competitive product market with competitive factor markets, the firm should hire labour until the marginal product of labour equals the wage rate (MPL = W). However, for profit maximisation, the firm should also ensure that the marginal revenue from producing an additional unit of the good is greater than or equal to the marginal cost of that unit, which includes the cost of labour. We know that the marginal revenue is equal to the price in a competitive market, so we can rewrite the condition as P x MPL = W. Therefore, option B is the best choice.

Suppose a Firm Is Operating in a Competitive Product Market