Question

At the annual dinner of EDevice Inc, two managers were talking about hiring practices in their districts. You overheard one of them make the following remark: “Once I found out that a worker was causing diminishing returns, I fired him.” Did the manager do a good job from an economic standpoint by firing the manager? Explain your answer using what you have learned from this chapter.

Answer 1

The marginal revenue productivity theory of wages is a theory in neoclassical economics which states that wages are paid at a level equal to the marginal revenue product of labor .

Diminishing returns means that with each added input or unit of labor leads to a decreasing rate of output . The marginal product from labor starts to decline . But the wage is constant . So the employer gets less profit from hiring this unit of labor .

Hence from economic stand point this is a good decision .