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Author Question: Why does a firm maximize its profits by hiring so that VMP = W? What will be an ideal ... (Read 60 times)

Pineappleeh

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on: Jun 29, 2018
Why does a firm maximize its profits by hiring so that VMP = W?
 
  What will be an ideal response?

Question 2

What does elasticity measure?
 
  What will be an ideal response?


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manuelcastillo

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Reply #1 on: Jun 29, 2018
Answer to Question 1

The VMP represents the additional revenue generated by the last worker. The wage is the cost of the last worker. If VMP > W, then an additional worker adds more to revenue than to cost and so hiring the worker boosts the firm's profit. Conversely, if VMP < W, then decreasing labor reduces costs more than it reduces revenue and thereby decreasing the quantity of labor it employs raises the firm's profit. Only when VMP = W can no other level of labor create a greater profit.

Answer to Question 2

Elasticity measures the response in one variable when another variable changes.


Pineappleeh

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Reply 2 on: Jun 29, 2018
Great answer, keep it coming :)

brbarasa

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Reply 3 on: Yesterday
Excellent

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