A perfectly competitive firm sells its output at Rs 10 per unit and can hire labour at Rs 55 per hour. The marginal product of the 1st, 2nd, 3rd, 4th and 5th hour of labour is 10, 8, 6, 5 and 3 units of output respectively. How many hours of labour will the firm employ to maximise profit?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → 3 hours
Given:
Price of output = Rs 10
Wage = Rs 55 per hour
Marginal product of hours 1 to 5 = 10, 8, 6, 5, 3 units
A competitive firm hires one more hour as long as the value of marginal product (VMPL = price × MPL) is more than the wage.
\( \text{VMPL} = 10 \times 10,\; 10 \times 8,\; 10 \times 6,\; 10 \times 5,\; 10 \times 3 \)
\( \text{VMPL} = 100,\; 80,\; 60,\; 50,\; 30 \)
The 3rd hour brings Rs 60, more than the wage of Rs 55. The 4th hour brings only Rs 50, less than the wage, so it lowers profit. The firm employs 3 hours.
NCERT (2026-27): “Wage Determination in Labour Market … Since we are dealing with a perfectly competitive firm, marginal revenue is equal to the price of the commoditya and hence marginal revenue product of labour in this case is equal to the value of marginal product of labour (VMPL). As long as the VMPL is greater than the wage rate, the firm will earn more profit by hiring one more unit of labour, and if at any level of labour employment VMPL is less than the wage rate, the firm can increase her profit by reducing a unit of labour employed.” |