How does a business use marginal analysis to decide how many workers to employ?

• A. By employing workers until the average product of labor is maximized
• B. By hiring workers until total revenue equals total cost
• C. By increasing the number of workers whenever profits are positive
• D. By comparing the marginal revenue product of labor to the marginal cost of hiring an additional worker

Answer: (D)

Verified step by step guidance

1. Understand that marginal analysis in labor employment involves comparing the additional benefit of hiring one more worker to the additional cost of that worker.
2. Define the Marginal Revenue Product of Labor (MRP_L) as the additional revenue generated by employing one more worker. It is calculated as \(\text{MRP}_L = \text{Marginal Product of Labor} \times \text{Price of Output}\).
3. Define the Marginal Cost of Labor (MC_L) as the additional cost incurred by hiring one more worker, typically the wage rate.
4. The firm should continue to hire additional workers as long as the Marginal Revenue Product of Labor is greater than or equal to the Marginal Cost of Labor, i.e., \(\text{MRP}_L \geq \text{MC}_L\).
5. Stop hiring more workers when the Marginal Revenue Product of Labor equals the Marginal Cost of Labor, because hiring beyond this point would reduce profit.