Answer to Question #41073 in Macroeconomics for sarah

Question

Explain how the firm would use the marginal product of labour to determine the profit maximizing quantity of labour, which the firm would hire?

Answer 1

The general rule is that firm maximizes profit by producing that quantity of output where marginal revenue equals marginal costs. The profit maximization issue can also be approached from the input side. That is, what is the profit maximizing usage of the variable input? To maximize profit the firm should increase usage of the input "up to the point where the input's marginal revenue product equals its marginal costs". So mathematically the profit maximizing rule is MRPL = MCL, where the subscript L refers to the commonly assumed variable input, labor. The marginal revenue product is the change in total revenue per unit change in the variable input. That is MRPL = ∆TR/∆L. MRPL is the product of marginal revenue and the marginal product of labor or MRPL = MR x MPL.