A firm produces in a perfectly competitive market and hires labor in a perfectly competitive labor market.The firm hires four workers, the marginal product of the fourth worker is 4, and the wage rate is $40.The firm produces 100 units of the product, which sell for a price of $10.This firm is
A)maximizing profit when it hires four workers
B)not maximizing profit and should hire more workers to increase profit
C)not maximizing profit and should hire fewer workers to increase profit
D)not maximizing profit when it produces 100 units of the product and should increase production to increase profit
E)not maximizing profit when it produces 100 units of the product and should decrease production to increase profit

Question

Quizplus · Accepted Answer

The marginal product of the fourth worker is positive, indicating that the firm should hire this worker. The wage rate of $40 is less than the marginal revenue product of labor, which is equal to the marginal product of labor multiplied by the price of the output, which in this case is $10. This means that hiring the fourth worker increases the firm's profit. Hiring additional workers would increase total labor costs and may not increase output enough to generate additional revenue. Therefore, the firm is maximizing profit by hiring four workers.

A Firm Produces in a Perfectly Competitive Market and Hires