This condition applies to any firm and any factor, in any market structure.
In the special case of competitive goods and factor markets, however, we
can simplify the condition. In competitive factor markets the marginal
cost of the factor is simply the factor’s price, since the firm can hire any
amount of the factor at its market price. Call this factor price w. Also, we
know that in competitive goods markets, the firm’s MR is just the market
price of the product, p. It follows that MRP is equal to Thus, a
profit-maximizing competitive firm should hire units of a variable factor
until:
To check your understanding of Equation 13-2 , consider an example.
Suppose labour is available to the firm at a cost of $10 per hour
Suppose also that employing another hour of labour adds 3
units to output and that any amount of output can be sold at a
market price of $5 per unit Thus, the additional hour of labour
adds $15 to the firm’s revenue but only $10 to its costs. In this case, the
firm will increase profits by hiring more hours of labour. The firm will
stop hiring additional labour only when the marginal cost of hiring (
equal to the marginal revenue product
Marginal cost
of the factor =Marginal revenue product
of the factor
MP×MR(13-1)
MP×p.w=MP×p(13-2)
(w=$ 10 ).
(MP= 3 )
(p=$ 5 ).
(MP×p).