Question

Which of the following best explains why the profit-maximizing level of employment for a firm occurs when the marginal revenue product of labor (MRPN) equals the nominal wage (W)?

A. At that level of employment, the firm has the optimal quantity of capital and thus is maximizing profit.
B. At that level of employment, the firm's output is maximized and thus it earns the highest possible profit.
C. At that level of employment, the marginal benefit from the last worker is equal to the marginal cost of the last worker.
D. At that level of employment, further increases in employment would reduce total output.

Answer 1

The profit-maximizing level of employment occurs when the marginal revenue product of labor equals the nominal wage because the marginal benefit from the last worker is equal to the marginal cost of the last worker.

Step-by-step explanation:

The profit-maximizing level of employment for a firm occurs when the marginal revenue product of labor (MRPN) equals the nominal wage (W) because at that level of employment, the marginal benefit from the last worker is equal to the marginal cost of the last worker. In other words, the additional revenue generated by hiring the last worker is equal to the additional cost of employing that worker.

For example, if the going market wage is $20 and the marginal revenue product of labor is also $20 at a certain level of employment, it means that the firm is getting $20 worth of additional revenue for each additional worker it hires. At this point, hiring additional workers would not generate any additional revenue, so the firm stops hiring.