Suppose that the marginal product of the last worker employed by a firm is 40 un

Question

Suppose that the marginal product of the last worker employed by a firm is 40 units of output per day and the daily wage that the firm must pay is $20, while the marginal product of the last machine rented by the firm is 120 units of output per day and the daily rental price of the machine is $30. Answer your question using MRP, MWC and other relevant topics in Labor Economics

a. Why is this firm not maximizing output or minimising costs in the long run?
b. How can the firm maximize output or minimise costs?

Explanation / Answer

a. To maximise firm's output, firm has to produce that units at which firm's marginal product become equal to the marginal wage. But in the above scenario, firm is not operative at this equality level.

b. This firm can maximizes its profits or minimise cost by hiring the quantity of labor at which MRP = MWC or MRP = W.

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