Question

In 2009 General Motors (GM) announced that it would reduce employment by 21,000 workers. What does this decision reveal about how GM viewed its marginal revenue product (MRP) and marginal resource cost (MRC)? Why didn’t GM reduce employment by more than 21,000 workers? By fewer than 21,000 workers?

Answer 1

The decision of General Motors (GM) to reduce employment by 21,000 workers in 2009 means that, at that time the marginal revenue product (MRP) of the labor used by GM was lower than the marginal resource cost (MRC) of labor i.e., wages.

In the labor market, a company hires that amount of resource at which the MRP is equal to the MRC. MRP is nothing but the product of marginal physical product (MPP) of the input and the marginal revenue (MR).

The reason why GM didn’t reduce employment by more than 21,000 workers or by less than 21,000 workers must be because equalization of MRP and MRC needed employment to be reduced by only 21,000.