Say a firm that sells its product at a price of $20 is using 20 units of labor. If the marginal product of the last unit of labor hired was 10, and the firm pays each worker a wage of $40, the this firm should:
A)hire more workers
B)decrease the number of workers
C)keep the same number of workers
D)decrease its output

Question

Quizplus · Accepted Answer

The marginal product of labor (MPL) is the additional output that an extra unit of labor produces. In this case, the MPL is 10, which means that the firm's output will increase by 10 units if it hires an additional worker. Since the firm pays each worker a wage of $40 and sells its product at $20, it should only hire an extra worker if the extra revenue that this worker generates (10 units x $20 per unit = $200) is greater than the extra cost of hiring the worker ($40). Since the extra revenue of $200 is greater than the extra cost of $40, the firm should hire more workers.

Say a Firm That Sells Its Product at a Price