Question

if a competitive firm pays its workers the value of the marginal product of the last worker hired, which of the following is true?
a. the firm will not earn any economic profits.
b. workers will look for employment elsewhere.
c. the wage will be less than the marginal product.
d. the firm will not maximize profits.
e. the contribution of the last worker hired to the firm’s profit will be zero.

Explanation:

To solve this, we analyze each option:

• Option A: In a competitive market, firms can earn economic profits in the short - run. Paying workers the value of the marginal product of the last worker hired does not necessarily mean zero economic profit. So A is incorrect.
• Option B: If workers are paid the value of their marginal product, this is a fair compensation mechanism. There is no reason for workers to automatically look for employment elsewhere. So B is incorrect.
• Option C: The value of the marginal product of labor ($VMPL$) is equal to the price of the output ($P$) times the marginal product of labor ($MPL$), i.e., $VMPL = P\times MPL$. In a competitive labor market, the firm pays the wage ($w$) equal to the $VMPL$ of the last worker. So the wage is equal to the value of the marginal product, not less than the marginal product. So C is incorrect.
• Option D: A competitive firm maximizes profit when it hires workers up to the point where the wage ($w$) is equal to the value of the marginal product of labor ($VMPL$). So if it pays workers the $VMPL$ of the last worker hired, it is maximizing profit. So D is incorrect.
• Option E: The profit - maximizing condition for a firm in terms of labor hire is $w = VMPL$. The contribution of a worker to profit is $VMPL - w$. If $w = VMPL$, then the contribution of the last worker hired to the firm's profit is $VMPL - w=0$. So E is correct.

Answer:

E. The contribution of the last worker hired to the firm’s profit will be zero.