Answer to Question #60780 in Economics for Muhammad Saad

Question

According to the rule for optimal input usage, a firm should hire a person as long as her
marginal revenue product is greater than her marginal cost to thecompany. It is well known that many companies have management training programs in which new trainees are paid relatively high starting salaries and arenot expected to make substantial contributions to the company until after the program is over (programs may run between 6 to 18 months). In offering such training programs, is a company violating the optimality rule? Explain in detail.

Answer 1

According to the rule for optimal input usage, a firm should hire a person as long as her
marginal revenue product is greater than her marginal cost to the company. Although the new trainees are paid relatively high starting salaries and are not expected to make substantial contributions to the company until after the program programs may run between 6 to 18 months, but in offering such training programs a company is violating the optimality rule, because only after the program all employees will provide the higher marginal revenue, which will be greater, than the marginal costs.