In terms of the marginal product of labor, how much labor is needed to produce one more unit of output? If the cost of that labor is w, then how much does one more unit of output cost to produce? If a firm is a perfectly competitive profit maximizer, show why they produce where w equals the marginal revenue product of labor.
What will be an ideal response?
The reciprocal of the marginal product of labor is required to produce one more unit of output. Hence, one more unit of output costs w times the reciprocal of the marginal product of labor. Since the firm is perfectly competitive, they are a price taker and their marginal revenue is simply the price of their good (P). In order to maximize profits, they set P=MC. But, as just mentioned the cost of producing one more unit (MC) is w times the reciprocal of the marginal product of labor. Cross multiplying equates w with the marginal revenue product.
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