Firms use information on labor’s marginal revenue product to determine
how many workers to hire at each wage rate.
how much labor services to supply at each wage rate.
how much marginal product to produce at each wage rate.
how much to produce at each output price.
The Correct Answer and Explanation is :
The correct answer is: how many workers to hire at each wage rate.
Explanation:
Firms use the concept of the marginal revenue product of labor (MRP) to determine the optimal number of workers to hire at each wage rate. The MRP refers to the additional revenue generated by employing one more unit of labor. Essentially, it is calculated by multiplying the marginal product of labor (MPL) by the marginal revenue (MR) a firm receives from selling the additional output produced by that extra unit of labor.
When deciding how many workers to hire, firms will compare the MRP of labor to the wage rate. The decision rule is simple: as long as the MRP of an additional worker is greater than or equal to the wage rate, the firm will continue to hire more workers. Once the MRP of labor falls below the wage rate, firms stop hiring because the cost of employing an additional worker exceeds the revenue that the worker would generate.
Here’s how the process works in practice:
- Marginal Product of Labor (MPL): This is the additional output produced by an additional worker. Initially, MPL typically increases as workers specialize and collaborate, but beyond a certain point, diminishing returns set in, and MPL starts to decline.
- Marginal Revenue (MR): The additional revenue earned from selling the output produced by the extra unit of labor. For firms in perfect competition, MR equals the price of the product. However, in imperfect competition (like a monopoly), MR is less than the price.
- Marginal Revenue Product (MRP): MRP is calculated by multiplying MPL by MR. Firms hire workers until the point where the wage rate equals the MRP.
Thus, firms assess the MRP to decide how many workers to hire because this allows them to maximize their profit by ensuring that the revenue from each additional worker justifies the cost of employing them.
I’ll generate a visual to illustrate the relationship between wage rate and the number of workers hired based on MRP.
Here is an illustration showing the relationship between wage rate and the number of workers hired by a firm, using the marginal revenue product (MRP) of labor curve. The point where the MRP curve intersects the wage line represents the optimal number of workers the firm will hire at that wage rate. Let me know if you’d like further explanation or details!
