Final answer:
The marginal physical product is the additional output from employing an additional unit of labor, while the value of the marginal product is calculated by multiplying MPP by the product's price. In a perfectly competitive labor market with a wage rate of $12, a firm's profit-maximizing employment level is reached when this wage equals the value of the marginal product of labor.
Step-by-step explanation:
The concept of marginal physical product (MPP) refers to the additional output resulting from the use of one more unit of a variable factor of production, typically labor. The Value of the Marginal Product (VMP) is calculated by multiplying the MPP by the price of the product. Therefore, the Value of the Marginal Product is the additional revenue a firm earns from employing one more unit of labor, assuming the price of the product remains constant.
To find the firm's profit-maximizing level of employment, we use the given information that a perfectly competitive labor market has a market wage of $12. The firm will continue to hire more labor until the additional cost of hiring (the wage rate) is equal to the additional revenue gained from selling the extra product produced by the additional worker (the marginal revenue product). This equilibrium is reached when the wage rate equals the value of the marginal product of labor.
Without additional data on how the MPP changes with each additional worker, we can only state that the firm's profit-maximizing level of employment will be at the point where the value of the marginal product of labor is equal to $12. At this level, the cost of hiring the last worker is just equal to the revenue they generate, meaning that any further hires would not add to profits.