Marginal resource cost is: A) Determined by the marginal physical product schedule for an input B) A firm’s cost of hiring one group of inputs, such as capital or labor C) The increase in a firm’s total cost caused by hiring one additional unit of an input D) The firm’s demand curve for a productive resource
The Correct Answer and Explanation is:
Correct Answer: C) The increase in a firm’s total cost caused by hiring one additional unit of an input
Explanation:
Marginal Resource Cost (MRC) is a fundamental concept in microeconomics, particularly in the study of labor markets and resource allocation in production. It refers to the additional cost a firm incurs when it hires one more unit of a particular resource, such as labor, capital, or raw materials. This makes option C the correct answer.
To understand this clearly, think of a factory hiring workers. If the factory has five workers and pays each one 100 dollars per day, the total cost is 500 dollars. If it hires a sixth worker at the same rate, the total cost rises to 600 dollars. The marginal resource cost of hiring the sixth worker is 100 dollars.
This concept is important because it helps firms make decisions about resource use. A profit-maximizing firm will compare the marginal revenue product (MRP) of an input to its marginal resource cost. The MRP is the additional revenue generated by employing one more unit of input. As long as the MRP exceeds the MRC, the firm will benefit from hiring more of that input.
In a perfectly competitive labor market, the wage rate is constant, so the MRC is equal to the wage rate. However, in a monopsony (where there is only one employer), the firm may need to increase wages to attract more workers, making the MRC greater than the wage paid to each additional worker.
Now, to explain why the other options are incorrect:
- A refers to marginal physical product, which relates to output, not cost.
- B is too broad and vague.
- D confuses marginal resource cost with a firm’s demand for a resource, which is determined by marginal revenue product, not cost.
Thus, option C precisely defines marginal resource cost.
