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21 July, 12:27

A profit-maximizing firm will use more of a factor of production when: The extra cost of using an additional factor unit is less than the marginal revenue product of the additional factor unit. The marginal physical product of the additional factor unit is greater than the marginal revenue product (MRP) of the additional factor unit. The marginal physical product of the additional factor unit is less than the marginal revenue product of the additional factor unit. The extra cost of using an additional factor unit is less than the marginal physical product of the additional factor unit.

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  1. 21 July, 12:53
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    The extra cost of using an additional factor unit is less than the marginal revenue product of the additional factor unit.

    Explanation:

    A profit maximizing firm will continue to use more factors of production as long as the cost of the extra factors of production is equal to or less than the marginal revenue product. Marginal revenue product refers to the additional revenue generated by employing extra units of factors of production. It is calculated by multiplying the marginal product (the number of extra units produced) times the selling price of the extra units produced.

    E. g. a firm that produces chairs will continue to increase its production level as long as the cost of direct labor, materials and variable manufacturing overhead is less or equal to the selling price of the chairs.
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