If a firm wants to maximize profits it should

Question

Quizplus · Accepted Answer

Maximizing profits requires equating the marginal revenue product (MRP) for each input to the price of the input. This is because the MRP represents the additional revenue that each input contributes to the firm's total revenue, and equating it to the price ensures that the marginal cost of each input is equal to the additional revenue generated by that input, resulting in maximum profit. Hiring lots of capital and very little labor or hiring unskilled labor rather than skilled labor may reduce costs, but it does not necessarily maximize profits. Equating the marginal physical product for each input to the price of the input is not effective because it does not take into account the revenue generated by each input.

If a Firm Wants to Maximize Profits It Should