A firm that is hiring labor in a purely competitive labor market and selling its product in a purely competitive product market will maximize its profit by hiring labor until
A) marginal revenue product is zero.
B) marginal revenue product exceeds marginal resource (labor) cost by the greatest amount.
C) marginal resource cost is zero.
D) marginal revenue product equals marginal resource (labor) cost.

Question

Quizplus · Accepted Answer

In a purely competitive labor market, the firm is a price taker and can hire as much labor as it wants at the going market wage rate. In this situation, the marginal revenue product (MRP) of labor equals the marginal product of labor times the price of the firm's output. The firm will hire labor up to the point where the MRP of labor equals the marginal resource (labor) cost (MRC), i.e., where MRP=MRC. This is because at this point, the firm is maximizing its profit by generating the greatest amount of revenue from each additional unit of labor hired while minimizing its cost of hiring that labor. Therefore, the correct answer is D, where the firm will hire labor until the MRP of labor equals the MRC of labor.

A Firm That Is Hiring Labor in a Purely Competitive