Which of the following are true at the point of equilibrium of a firm when both the product market and…
A profit-maximising firm hires labour up to the point where the marginal revenue product of labour (MRP = MR × MPL) equals the marginal factor cost of labour (MFC), so B is…
Choose your answer
Which of the following are true at the point of equilibrium of a firm when both the product market and the labour market are perfectly competitive?
A. Marginal Revenue Product of labour = Marginal value product of labour.
B. Marginal Revenue Product of labour = Marginal Factor cost of labour.
C. Marginal Revenue Product of labour = Marginal utility of labour.
D. Marginal Revenue Product of labour = Marginal utility of demand.
Answer and explanation
Correct answer A
A profit-maximising firm hires labour up to the point where the marginal revenue product of labour (MRP = MR × MPL) equals the marginal factor cost of labour (MFC), so B is true. When the product market is perfectly competitive, marginal revenue equals price, so MRP equals the value of the marginal product (VMP = P × MPL, also called the marginal value product), and A is true; with a perfectly competitive labour market MFC also equals the wage, so W = MFC = MRP = VMP at equilibrium. Neither the 'marginal utility of labour' nor the 'marginal utility of demand' enters the firm's hiring condition, so C and D are false.
Practice for these exams
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UGC NET HRM / Labour Welfare and Industrial Relations