Question

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

Short answer

A short answer to the question is: If 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 the worker is greater than the revenue generated by the worker. They should let some workers go to maximize their profit. The correct answer is (a).

Step-by-step solution

Define Marginal Revenue Product (MRP)

MRP is the additional revenue generated by hiring an additional worker. It can be calculated by multiplying the marginal product of labor (MPL) by the price of the output produced.

Compare MRP with the wage rate

If the MRP of the last worker hired is lower than the wage rate, it means the cost of hiring the worker (wage rate) is greater than the revenue generated by the worker (MRP).

Analyze the result

Since the MRP of the last worker is lower than the wage rate, the firm is losing money by hiring this worker. It indicates that the firm has hired too many workers, and they should let some workers go to maximize their profit. So, the correct answer is: a) hired too many workers

Key concepts

Marginal Product of Labor

Understanding the Marginal Product of Labor (MPL) is crucial in economics and business as it represents the additional output that is generated by employing one more unit of labor. Simply put, it's the change in production that occurs when one more worker is added to the production process.

For a company, analyzing the MPL is essential because it informs decisions on whether hiring additional employees will be beneficial to the production and overall revenue. This concept falls under the larger framework of the production function, which explores the relationship between the quantities of input and output.

An increase in MPL can be a sign that the new workers are contributing significantly, perhaps due to specialization or efficient allocation of tasks. On the contrary, a decrease can reflect a saturation point where additional workers no longer contribute meaningfully to production, often referred to as the 'Law of Diminishing Returns'. Therefore, beyond a certain point, hiring more workers will not result in proportional increases in output, and this information is crucial for businesses when making hiring decisions.

Wage Rate

The Wage Rate is defined as the amount of compensation that workers receive for their labor per unit of time, which could be hourly, daily, or annually. It's a straightforward yet fundamental aspect of the workforce and economics that directly impacts the cost of production and the standard of living for workers.

In the context of profit and business operations, the wage rate is not merely a cost but an investment in the workforce. Businesses must decide what wage rate is sustainable for their operations while remaining attractive enough to secure skilled labor. The equilibrium wage rate in the market is often determined by the balance between the supply of labor and the demand for it. Additionally, minimum wage laws, union negotiations, and competitive pressures may also influence the wage rates that companies offer.

An optimal wage rate supports a company's long-term profitability by ensuring that employees are both motivated and cost-effective. However, when the wage rate exceeds the value added by the worker, as indicated by their Marginal Revenue Product, a company may reconsider its employment levels to maintain profitability.

Profit Maximization

The goal of Profit Maximization is at the heart of most business strategies, which involves earning the highest possible profit with the least possible cost. To achieve this, firms must make precise decisions about production levels, pricing, and employment based on the analysis of costs and revenues.

One of the key considerations in this objective is understanding the relationship between the cost of resources (like labor) and the revenue these resources can generate. Employing too many workers can push the costs higher without equivalent revenue gains, especially when the Marginal Revenue Product of labor falls below the wage rate. Conversely, employing too few workers can result in missed opportunities for production and sales.

Each business strives to find that 'sweet spot' where the cost of additional workers (the wage rate) is exactly balanced by the revenue those workers generate (their MRP). This balance is critical in attaining the closest point to profit maximization, which is not simply about cutting costs or increasing production blindly, but about making judicious use of resources to yield the maximum possible profit.