Question

For a perfectly competitive​ firm, the marginal cost curve determines how much output a​ profit-maximizing firm will produce. For input​ markets, the marginal revenue product curve determines how much labor a​ profit-maximizing firm will hire in a perfectly competitive labor market. Explain how the reasoning behind these two concepts is related. A. Profit will increase for each unit of labor where the wage is greater than the marginal revenue product. B. Profit will increase for each unit of labor where the marginal revenue product is greater than the wagefor each unit of labor where the marginal revenue product is greater than the wage. C. Profit increases so long as the additional gain in cost exceeds the additional gain in revenue. D. Profit increases for each unit of output where marginal cost is greater than price.

Answer 1

B) Profit will increase for each unit of labor where the marginal revenue product is greater than the wage for each unit of labor where the marginal revenue product is greater than the wage.

Step-by-step explanation:

The marginal revenue product basically determines how much money does an additional unit of labor generates for the company. MRP = marginal physical output (amount of units produced) x marginal revenue (selling price of the units). As long as the MRP is larger than the wage paid to the additional employee, then the revenue of the company will increase.

The marginal cost curve follows a similar pattern, since the company's profit will increase as long as the marginal revenue per unit is larger than the marginal cost per unit. The company will keep increasing output until the marginal revenue equals the marginal cost. At this point, the company will have maximized its accounting profit.