Question

According to the profit-maximizing rule for hiring resources, the firm should hire
labor and capital until the marginal revenue product for each equals the
(A) market price of the product.
(B) quantity oflabor and capital hired.
(C) price ceiling for the product.
(D) profit per unit for each.
(E) marginal resource cost of each.

Answer 1

Answer:

E) marginal resource cost of each.

Explanation:

A profit-maximizing firm should continue to work more workers or capital as long as the marginal revenue product of an extra resource is greater than the marginal resource cost of the resource. In other words, a firm should employ if the benefits derived from the resource are greater than the cost associated with that resource.

Profit-maximizing firms should hire more labor and capital until the marginal revenue product equals the marginal resource cost. The firm should stop hiring when the value of extra labor or capital equals the cost of the resource. If the firm continues hiring, it will make losses as the costs will be more than the benefits.