If a firm in a competitive labour market finds that, at its current level of employment, VMP W, it will
A) be minimising profits.
B) increase the amount of labour it hires.
C) be maximising profits.
D) decrease the amount of labour it hires.

Question

If a firm in a competitive labour market finds that, at its current level of employment, VMP > W, it will
A) be minimising profits.
B) increase the amount of labour it hires.
C) be maximising profits.
D) decrease the amount of labour it hires.

Quizplus · Accepted Answer

In a competitive labor market, if the value of the marginal product (VMP) of labor is greater than the wage rate (W), it means that each additional unit of labor adds more to revenue than it costs in wages. Therefore, the firm can increase its profits by hiring more labor until VMP equals W.

If a Firm in a Competitive Labour Market Finds That