The theory states that workers will be hired up to the point when the marginal revenue product is equal to the wage rate. If the marginal revenue brought by the worker is less than the wage rate, then employing that laborer would cause a decrease in profit.
Why does a person respond by working less to a higher wage?
Workers substitute income for leisure. A wage level will be reached beyond which workers will do less work for higher wages because they can maintain the same satisfaction as before, or even increase it, with less work effort. As people become wealthier they take more leisure and do less work.
What would the relationship between the marginal cost of hiring an additional worker and the wage be in a perfectly competitive labor market?
In a perfectly competitive market, the firm’s marginal revenue product of labor is the value of the marginal product of labor. The market wage rate in a perfectly competitive labor market represents the firm’s marginal cost of labor, the amount the firm must pay for each additional worker that it hires.
What is the marginal productivity condition of a profit maximizing firm?
What is the marginal productivity condition of a profit-maximizing firm? The firm should produce up to the point where the cost of producing an additional unit of output is equal to the revenue from selling an additional unit of output.
How do you use the lowest cost rule?
The least cost combination is found where the marginal product per dollar for all the resources a firm employs are equal (MPL/PL=MPN/PN=MPC/PC). If the ratios are not equal, a firm would reduce cost by employing more of the resource with a higher MP/P and less of the resource with a lower MP/P.
What is the marginal productivity condition of a profit-maximizing firm?
How does a profit-maximizing firm that is operating in a competitive?
To maximize profits, the firm should set marginal revenue equal to marginal cost. Given the fact that this firm is operating in a competitive market, the market price it faces is equal to marginal revenue. Thus, the firm should set the market price equal to marginal cost to maximize its profits: 9 = 3 + 2q, or q = 3.
