Lancaster adds accountants, her service can take more calls. She must determine how many accountants to hire.Īs Ms. Lancaster’s business has expanded, so she hires other accountants to handle the calls. Lancaster’s firm, TeleTax, is one of several firms offering similar advice the going market price is $10 per call. and 10 p.m., customers can call and get advice on their income taxes. Suppose that an accountant, Stephanie Lancaster, has started an evening call-in tax advisory service. If marginal product is falling, marginal revenue product must be falling as well. The law of diminishing marginal returns tells us that if the quantity of a factor is increased while other inputs are held constant, its marginal product will eventually decline. In \: perfect \: competition, \: MRP_L = MP_L \times P If still another programmer would increase annual total revenue by $48,000 but would also add $49,000 to the firm’s total cost, that programmer should not be hired because he or she would add less to total revenue than to total cost and would reduce profit. Since the programmer will add $49,000 to total cost and $50,000 to total revenue, hiring the programmer will increase the company’s profit by $1,000. It will continue to hire more and more labor up to the point that the extra revenue generated by the additional labor no longer exceeds the extra cost of the labor.įor example, if a computer software company could increase its annual total revenue by $50,000 by hiring a programmer at a cost of $49,000 per year, the marginal decision rule says that it should do so. But how much labor will the firm employ? A profit-maximizing firm will base its decision to hire additional units of labor on the marginal decision rule: If the extra output that is produced by hiring one more unit of labor adds more to total revenue than it adds to total cost, the firm will increase profit by increasing its use of labor.
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