Consider the following statements about a profit-maximising firm that hires labour:
(A) The extra cost of hiring one more unit of labour is the wage rate.
(B) Marginal revenue product of labour is marginal revenue times the marginal product of labour.
(C) The firm employs labour up to the point where the wage rate equals the average product of labour.
(D) The extra output produced by one more unit of labour is its marginal product.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (B) and (D) only
A firm hires one more unit of labour if what it adds to revenue is at least what it adds to cost. The extra cost is the wage and the extra revenue is the marginal revenue product of labour.
(A) The extra cost of hiring one more unit of labour is the wage rate. — Correct. Hiring one more unit of labour costs the firm the wage rate.
(B) Marginal revenue product of labour is marginal revenue times the marginal product of labour. — Correct. Each extra unit of labour adds MPL units of output, and each unit sells for MR. So MRPL = MR × MPL.
(C) The firm employs labour up to the point where the wage rate equals the average product of labour. — Incorrect. The firm hires labour till the wage equals the marginal revenue product of labour. The average product plays no part in this rule.
(D) The extra output produced by one more unit of labour is its marginal product. — Correct. The marginal product of labour is the extra output from one more unit of labour.
NCERT (2026-27): “Wage Determination in Labour Market … The firm being a profit maximiser will always employ labour upto the point where the extra cost she incurs for employing the last unit of labour is equal to the additional benefit she earns from that unit. The extra cost of hiring one more unit of labour is the wage rate (w). The extra output produced by one more unit of labour is its marginal product (MPL) and by selling each extra unit of output, the additional earning of the firm is the marginal revenue (MR) she gets from that unit. Therefore, for each extra unit of labour, she gets an additional benefit equal to marginal revenue times marginal product which is called Marginal Revenue Product of Labour (MRPL). Thus, while hiring labour, the firm employs labour up to the point where w = MRPL and MRPL = MR × MPL” |