The general rule for hiring any input (say, labor) in the profit-maximizing amount is MRC = MRP. This rule takes the special form W = MRP (where W is the wage rate) when the
A) labor supply curve is upsloping.
B) supply of labor is inelastic.
C) firm is hiring labor under purely competitive conditions.
D) firm is hiring labor under imperfectly competitive conditions.

Question

Quizplus · Accepted Answer

The special form of the profit-maximizing rule W = MRP applies only under purely competitive conditions, where the firm is a price taker and faces a perfectly elastic labor supply curve. In this case, any attempt to hire more or less labor would affect the wage rate, hence the equality of MRC and MRP implies W = MRP as the profit-maximizing hiring rule. Under imperfectly competitive conditions, the firm has some market power and faces a negatively sloped labor supply curve, implying that it cannot hire labor at a fixed wage rate but rather faces a trade-off between the wage rate and the quantity of labor hired. Therefore, the profit-maximizing hiring decision depends on both the MRP and the elasticity of the labor supply curve, and the equality of MRC and MRP may not hold.

The General Rule for Hiring Any Input (Say, Labor) in the Profit-Maximizing