Final answer:
A firm in a perfectly competitive labor market will hire workers until the market wage equals the worker's marginal revenue product to maximize profits.
Step-by-step explanation:
In a perfectly competitive labor market, the main objective for firms is to maximize profits. A critical aspect of this is determining the exact amount of labor to hire.
The principle guiding this decision is that firms will continue to hire additional workers until the point where the market wage (Wmkt) is equal to the marginal revenue product (MRP) of the last worker hired. Formally, this is given by the equation: Wmkt = VMPL (Value of Marginal Product of Labor).
For instance, if the market wage is $20, a profit-maximizing firm will hire workers until the MRP of the last worker is also $20. Hiring beyond this point would not increase profits, because the cost of hiring an additional worker (the wage) would exceed the value they add to the firm's output.
In order to maximize its profits, a firm that hires workers in a perfectly competitive labor market will hire workers up to the point where the market wage equals the marginal revenue product.
This means that the firm will continue to hire workers until the additional revenue generated by each additional worker is equal to the wage paid to that worker.
For example, if the going market wage is $20, the profit-maximizing level of employment is 4 because at that point, the marginal revenue product is $20.