A profit-maximizing firm will hire the variable input, labor, until the point where:
A) marginal product of labor is equal to the marginal revenue product of capital.
B) marginal revenue from each unit of output is equal to the wage rate.
C) marginal revenue product of labor is equal to the marginal cost of labor.
D) marginal revenue product of labor is equal to zero.
E) marginal product of labor equals the marginal revenue from each unit of output.

Question

Quizplus · Accepted Answer

A profit-maximizing firm will hire the variable input, labor, until the point where its marginal revenue product is equal to its marginal cost. Therefore, the optimal point of labor employment occurs when the marginal revenue product of labor is equal to the marginal cost of labor. Choice A is not correct because capital is not a variable input in this scenario. Choice B is not correct because it only considers the wage rate, but does not take into account the revenue generated by the additional output produced by the additional unit of labor. Choice D is not correct because if the marginal revenue product of labor is zero, the firm would not be able to generate any additional revenue from hiring additional units of labor. Choice E is not correct because it ignores the cost of labor.

A Profit-Maximizing Firm Will Hire the Variable Input, Labor, Until