Question

What is the profit-maximizing labor (L*)?

a) The labor quantity that minimizes costs
b) The labor quantity that maximizes revenue
c) The labor quantity that maximizes profit
d) The labor quantity that minimizes output

Answer 1

The profit-maximizing labor (L*) is the labor quantity that maximizes profit. Firms need to compare the marginal revenue product (MRP) of labor with the marginal cost of labor (MC) to determine the profit-maximizing level of employment.

Step-by-step explanation:

The profit-maximizing labor (L*) is the labor quantity that maximizes profit. In order to determine the profit-maximizing level of employment, firms need to compare the marginal revenue product (MRP) of labor with the marginal cost of labor (MC). When the MRP of labor is equal to the MC of labor, the firm is maximizing its profit.

For example, if the going market wage is $12 and the marginal revenue product of labor is also $12, then the profit-maximizing level of employment is when the firm hires workers up to the point where the wage equals the marginal revenue product.