A firm's decision to hire a factor of production does not depend on which of the following?

• A. The availability of substitute factors
• B. The marginal revenue product of the factor
• C. The firm's total revenue from all products
• D. The wage or price of the factor

Answer: (C)

Verified step by step guidance

1. Understand the concept of a firm's factor demand: A firm decides to hire a factor of production based on the additional benefit it gains from employing one more unit of that factor, which is captured by the Marginal Revenue Product (MRP) of the factor.
2. Recall that the Marginal Revenue Product (MRP) is calculated as the Marginal Product (MP) of the factor multiplied by the Marginal Revenue (MR) from selling the output produced by that factor, expressed as \(\text{MRP} = \text{MP} \times \text{MR}\).
3. Recognize that the firm compares the MRP to the factor's price (wage or rental rate) to decide whether to hire more of the factor. If \(\text{MRP} > \text{wage}\), the firm hires more; if \(\text{MRP} < \text{wage}\), it hires less.
4. Consider the availability of substitute factors: If substitutes are available at a lower cost or higher productivity, the firm may switch factors, affecting the demand for the original factor.
5. Note that the firm's total revenue from all products is not directly relevant to the decision to hire a specific factor because the decision depends on the marginal (additional) revenue generated by that factor, not the total revenue.