Question

If the MRP of the last worker hired is lower than the wage rate, the firm has \((\mathrm{LO3})\) a) hired too many workers b) hired too few workers c) hired the right number of workers

Short answer

In summary, when the MRP of the last worker hired is lower than the wage rate, the firm has hired too many workers, as the cost of hiring that worker is higher than the revenue generated by them. To maximize profit, the firm should optimize its workforce by reducing the number of workers hired.

Step-by-step solution

Define Marginal Revenue Product (MRP)

Marginal Revenue Product is the additional revenue a firm can generate by hiring one extra unit of labor (worker). It can be calculated by multiplying the marginal product of labor (MPL) with the marginal revenue (MR) generated from the sale of the good produced by that extra labor.

Understand the relationship between MRP and the number of workers

A profit-maximizing firm will hire workers up to the point where the MRP of the last worker hired is equal to the wage rate. If the MRP is higher than the wage rate, the firm can increase its profit by hiring more workers. Conversely, if the MRP is lower than the wage rate, the firm is not maximizing its profit, and it should reduce the number of hired workers. Now, let's apply this understanding to answer the given question.

Analyze the given information

According to the given exercise, the MRP of the last worker hired is lower than the wage rate. This means that the cost of hiring that particular worker (wage rate) is higher than the revenue generated by that worker (MRP).

Determine the optimal number of workers

Since the MRP of the last worker hired is lower than the wage rate, it indicates that the firm is currently not maximizing its profit. To maximize profit, the firm should optimize its workforce. In this case, the firm has hired too many workers, and as a result, the answer to the question is: a) hired too many workers

Key concepts

Profit Maximization

Profit maximization is a fundamental goal for most businesses. It's the point where a firm decides the optimal level of production that will result in the highest possible profit. For companies, this often involves determining the right balance between input costs, such as labor and materials, and revenue generation.

• Profit is maximized when there is no other adjustment that can be made to increase profit.
• In terms of labor, firms aim to hire workers up to the point where the marginal revenue product (MRP) equals the wage rate.

When a firm's MRP equals the wage rate, any additional worker hired would no longer contribute enough revenue to cover their wage. At this point, the firm should stop hiring to maintain profit maximization. If a firm hires too many workers, where MRP is less than the wage, they are incurring unnecessary costs that lower profit.

Marginal Product of Labor (MPL)

The Marginal Product of Labor (MPL) is a concept used in economics to determine the additional output a firm gains by hiring one more worker. Understanding MPL is crucial for making informed labor decisions. It helps a firm decide whether the cost of an additional worker is justified by the increase in production.

• MPL is the change in total output that results from hiring an additional worker, keeping all other inputs constant.
• It helps identify productivity levels and understand how labor contributes to revenue.

A high MPL means that each worker added to the workforce significantly boosts output, while a low MPL implies lesser contribution relative to their wage. A profit-maximizing firm evaluates MPL against wage rates to decide on hiring decisions.

Wage Rate

The wage rate is the amount a firm pays to its workers for their labor. It's a critical variable in determining the firm's expenses and plays a significant role in hiring decisions.

• A firm must balance wage costs against the revenues generated from the work performed by their employees.
• In profit maximization, firms aim for a wage rate that corresponds with the marginal revenue product (MRP).

If the wage rate exceeds the MRP, the firm should consider reducing its workforce to avoid extra costs that don’t contribute to increased revenue. Conversely, if the wage rate is below the MRP, the firm may benefit from hiring additional workers as each new worker can still contribute to profits. This balance ensures that the cost of labor is aligned with the production capacity and revenue generation of the business.