When the representative firm maximizes profits,
A) it sells as much as possible.
B) the wage equals average labor productivity.
C) the wage equals marginal labor productivity.
D) business taxes must be zero.

Question

Quizplus · Accepted Answer

When the representative firm maximizes profits, it chooses a level of labor that equates its marginal revenue product (MRP) to the wage rate. In other words, the wage equals the marginal labor productivity (MLP) of the last unit of labor hired. This is the efficient outcome because it ensures that each worker is contributing as much to the firm's revenue as they cost in wages. Choices A and D are incorrect because the representative firm will not necessarily sell as much as possible or have zero business taxes as part of profit maximization. Choice B is incorrect because the wage being equal to average labor productivity would not necessarily be the efficient outcome for profit maximization.

When the Representative Firm Maximizes Profits