Firms use information on labor’s marginal revenue product to determine A) how much to produce at each output price. B) how many workers to hire at each wage rate. C) how much marginal product to produce at each wage rate. D) how much labor services to supply at each wage rate.
The Correct Answer and Explanation is :
The correct answer is B) how many workers to hire at each wage rate.
Explanation:
Firms use the concept of marginal revenue product (MRP) of labor to determine how many workers to hire at different wage rates. The marginal revenue product of labor is the additional revenue a firm generates from employing one more unit of labor. It is calculated as the marginal product of labor (MP) multiplied by the price of the output (P). Essentially, MRP = MP × P.
In a competitive labor market, firms hire workers until the marginal revenue product of labor equals the wage rate. If the wage rate is higher than the MRP of the last worker hired, the firm would not hire that worker, as the cost of hiring would exceed the revenue generated from that worker. Conversely, if the wage rate is lower than the MRP, the firm would hire more workers since the cost of labor is less than the revenue they generate.
The decision to hire workers is central to a firm’s labor demand. The firm evaluates the value of the MRP against the cost of labor (the wage) and adjusts its employment decisions accordingly. Thus, the MRP of labor helps the firm determine the optimal number of workers to hire at each wage rate, which is option B.
This decision is not directly tied to how much to produce at each output price (option A) or how much marginal product to produce at each wage rate (option C), because production decisions and labor hiring decisions are often distinct in economic models. Option D, which concerns labor supply, is a concept more relevant to workers and not firms.
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