A corporate executive makes the following statement The company ...

[EY67]

A corporate executive makes the following statement  The company must keep hiring more workers up to the point where the marginal productivity of the last worker we hire is zero. This way we can maximize the total productivity of the firm.
 
   Critically evaluate this statement. Also comment on whether this is the correct objective function for the firm.

Question 2

When Little Furniture Company produces 100 chairs - its average variable cost is 25 . The marginal cost of the 101st chair is 22 . If the firm chooses to produce the 101st chair, what will happen to average variable cost? Explain.
 
  What will be an ideal response?

[fromAlphatoOmega22]

Answer to Question 1

This statement is true. If the company continues to hire all the way to the point where the marginal product of the last worker hired is zero then total product will be maximized. Hiring more workers than this will likely lead to negative marginal productivity and hiring fewer workers will lead to a positive marginal product. Either way, total product is maximized at a marginal product of zero. However, this may not be a wise policy since the objective function of a firm is to maximize profits not total productivity.

Answer to Question 2

If the firm decides to produce the 101st chair, its average variable cost will fall because the marginal cost is lower than the average variable cost.

[EY67]

Thanks for the timely response, appreciate it

[kjohnson]

Excellent