Profit maximising competitive firms hire labour until the wage is equal to

Question

BlackTom AI · Accepted Answer

Let’s break down what each option implies about the firm’s hiring decision and the associated economic concept.
Option a: marginal product. This is the extra output produced by an additional unit of labor, not the extra revenue generated. A profit-maximising firm looks at output value, not just quantity of output, when deciding how many workers to hire, so relying on marginal product alone misses the crucial revenue aspect.
Option b: total product. This is the overall quantity of output produced, not the incremental change when hiring one more worker. Since hiring decisions hinge on the gain from the next worker, focusing on total product ignores the marginal (incremental) impact which is what matters for hiring rules.
Option c: change in total product. This is essentially the same idea as marginal product but framed as the change in total output. While it signals a shift in output, it does not tie the extra output to its monetary value. In profit maximisation, we care about the revenue generated by that additional output, not just the output change alone.
Option d: change in total revenue. This captures the marginal revenue effect—the additional revenue generated by employing one more unit of labor. In perfect competition, the firm equates the wage to the marginal revenue product, i.e., the additional revenue from one more worker. Since revenue is the critical measure for determining whether hiring one more worker increases profit, this option aligns with the standard rule for profit-maximising hiring in competitive labour markets.

Profit maximising competitive firms hire labour until the wage is equal to

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