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3 June, 20:50

Explain why the profit maximizing level of employment for a firm occurs when the marginal revenue product of labor equals the nominal wage. How can this profit-maximizing condition be expressed in real terms?

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  1. 3 June, 20:58
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    The marginal revenue product is the benefit from hiring an additional unit of labor and nominal wage is the cost of hiring a labor. Profit is maximized when the two are equal. In real terms profit is maximized when marginal product of labor is equal to real wages.

    Explanation:

    The marginal revenue product of labor shows the benefit derived from hiring an additional unit of labor, while the nominal wage is the cost of hiring a labor. It will be profitable for the firm to hire additional labor as long as the marginal revenue product of labor is greater than the nominal wage. Profits will be maximized when the marginal revenue product derived from a labor is equal to nominal wage paid to the labor.

    This can be expressed in real terms by dividing them by the price of the good. The marginal revenue product of labor is equal to the marginal product of labor multiplied by the price of the good. The nominal wage is equal to the real wage times the price of the good.

    MRP=Nominal wages

    MPL*Price=Real wages*Price

    On dividing by price we get,

    MPL=Real wages

    So, the profit is maximized in real terms when marginal product of labor is equal to real wages.
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