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:

1. Recall the concept of value of marginal product (VMP) and profit maximization for a competitive firm. A competitive firm maximizes profit when it hires workers up to the point where the wage (\(w\)) equals the value of the marginal product of labor (\(VMP_L\)).
2. If the firm pays workers the \(VMP\) of the last worker hired, that means \(w = VMP_L\). The profit from hiring an additional worker is \(VMP_L - w\). If \(w = VMP_L\), then \(VMP_L - w=0\), so the contribution of the last worker to profit is zero.
3. Analyze other options:

• Option A: A competitive firm can earn economic profits in the short - run even when paying workers \(VMP\).
• Option B: There's no reason workers would look elsewhere as they are paid \(VMP\), which is the value they contribute.
• Option C: The wage equals \(VMP\) (not less), as the firm pays the value of the marginal product.
• Option D: The firm maximizes profit when \(w = VMP_L\), so it is maximizing profits.

Answer:

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