Chapter 13R, Problem 11MCQ

To determine

The correct option that defines the action which should be taken if marginal revenue product of labor is less than the wage rates.

Answer to Problem 11MCQ

Option d is correct.

Explanation of Solution

Explanation for correct option:

d.

In a perfectly competitive firm, the firm can increase factor units until the factor price is equal to the marginal revenue product. If marginal revenue product is less than wage rates then firm should not hire more workers instead it can hire fewer workers. Therefore, option d is correct.

Explanation for incorrect options:

a.

The firm should not shut down its firm in short-run when MRP is less than factor price. In short-run, firm should continue its operations until average revenue is unable to cover its AVC. Therefore, option a is incorrect.

b.

In long-run, the firm can be shut down if average revenue is unable to cover its average variable cost. Therefore, option b is incorrect.

c.

MRP curve represents the demand curve for labor. Hiring more workers will increase the factor cost as compared to the factor income. Therefore, option c is incorrect.

e.

Firm should change the number of workers it hires as per the change in demand for that factor. Therefore, option e is incorrect.

Economics Concept Introduction

Factor of production: Factor of production refers to the components or the resources that are required for producing intangible or tangible products.

Factor income: Factor income refers to returns received by the producer for inserting each factor of production as an input.