Question

A firm employs 50 workers on a product line. Each worker receives $20 per hour. The product the workers make sells for $10 per item. The marginal product of the fiftieth worker hired is 4 items per hour with a marginal revenue product of $40 for that hour.

a. The employer should stop hiring.

b. The employer should never stop hiring.

c. The employer should stop hiring when marginal revenue product of the additional labor is $20/hour.

d. The employer should stop hiring when marginal revenue product of the additional labor is $30/hour.

e. The employer should stop hiring when marginal revenue product of the additional labor is $40/hour.

Answer 1

A firm should hire employees up to the point where marginal revenue product is equivalent to the wage of the labour. It is given that each worker gets $20 per hour, which means that the wage of each worker is $20 per hour. So, the employer will hire employees to the point where the marginal revenue product of the additional labour becomes equivalent to $20 per hour.

Hence, the correct answer is Option C i.e. the employer should stop hiring when marginal revenue product of the additional labour is $20/hour.