Arrange the following steps in the correct order to show how a profit-maximising firm decides how much labour to employ:
(A) The firm finds the extra output produced by one more unit of labour (its marginal product).
(B) It multiplies this extra output by the marginal revenue from selling each extra unit of output.
(C) It compares this marginal revenue product of labour with the wage rate.
(D) It employs labour up to the point where the wage rate equals the marginal revenue product of labour.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (B), (C), (D)
The firm adds labour as long as the extra money it brings is more than its cost, the wage.
(A) The firm finds the extra output produced by one more unit of labour (its marginal product). — First the firm needs the extra output of one more unit of labour.
(B) It multiplies this extra output by the marginal revenue from selling each extra unit of output. — That extra output times marginal revenue gives the extra money it brings, the MRPL.
(C) It compares this marginal revenue product of labour with the wage rate. — The MRPL is then set against the cost of that labour, the wage.
(D) It employs labour up to the point where the wage rate equals the marginal revenue product of labour. — Profit is highest where the two are equal, so the firm stops at w = MRPL.
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” |