In the short run, a profit maximizing firm will respond to a reduction in the wage rate by
A)hiring more labor.
B)hiring more capital.
C)hiring less labor.
D)decreasing output.

Question

Quizplus · Accepted Answer

A profit maximizing firm will respond to a reduction in the wage rate by hiring more labor. This is because, in the short run, labor is typically considered to be a variable cost, meaning that it can be easily adjusted to meet changes in demand for the firm's output. Therefore, a lower wage rate will decrease the cost of each unit of labor, making it more attractive for the firm to hire additional workers to increase production and output. This increase in output allows the firm to increase its revenue and profits, assuming that demand for the product remains constant.

In the Short Run, a Profit Maximizing Firm Will Respond