Firms hire labour at the point where the
A)nominal wage rate equals the marginal product of labour.
B)real wage rate equals the marginal revenue product of labour.
C)nominal wage rate equals the marginal revenue product of labour.
D)real wage rate equals the marginal revenue product of capital.

Question

Quizplus · Accepted Answer

Firms hire labour up to the point where the marginal revenue product of labour (MRPL) equals the nominal wage rate, because this is where the firm maximizes its profit. MRPL is the additional revenue generated from hiring an extra unit of labour, and it equals the marginal product of labour (MPL) multiplied by the price of the output. The nominal wage rate is the amount of money paid per unit of labour service. Therefore, firms will hire labour up to the point where the additional revenue generated by the last unit of labour equals the cost of hiring that unit of labour (i.e. the nominal wage rate).

Firms Hire Labour at the Point Where the