Question

A fellow employee observes that business is “picking up” at your company. He claims that the firm ought to hire “about six persons and maybe a few extra just in case.” Help this employee understand the economic factors that go into hiring.

Answer 1

We know that production function is a function of the inputs used in the production process . And the cost minimization condition of production is that : ratio of marginal products of inputs = ratio of returns to inputs ( returns = wages , rents ) . We know that firms face diminishing marginal product after employing inputs to a certain extent . So the economic factor that goes to hiring is that :

Firms wish to achieve highest possible marginal product from each dollar spent on input ( labour ) . Firms will adjust their hiring of labour until the marginal product of labour per dollar is equal to all other inputs .

MP_L  / w = MPk / r