Practice Quiz

AP Microeconomics

Category - Microeconomics

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In order to effectively maximize its profit, a business should mire labor until MRP = W. True or false?
  1. True
  2. False
Explanation
Answer - A - True.

Key Takeaway: Unless told otherwise, you should always assume perfect competition within the labor market. Therefore, assume that all units of labor that are hired earn the exact same wage. So in this scenario, wage is the only cost added by each labor unit. Because marginal revenue product decreases, the curve slopes downward. In this case, the maximum profit occurs when wage equals the marginal revenue product (MRP = W).
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