Managerial Economicsintermediate
Explain the logic behind stopping additional hiring when marginal value product equals the wage.
Answer
Marginal value product measures the additional income from one more unit of labor, while the wage is the cost of that labor. When the two are equal, the additional income just matches the additional wage cost. The stated rule therefore identifies equality as the point to stop hiring.
Explanation
### The concept
A marginal decision compares the extra benefit and extra cost created by one additional unit. For labor, the additional benefit is marginal value product and the additional cost is the wage. If value is higher, hiring adds more income than wage cost; if value is lower, hiring costs more than it adds. Equality is the stopping condition in the course framework.
### What a good answer covers
- Defines marginal value product as additional income from labor.
- Identifies wage as the price or cost of labor.
- Explains why greater value supports hiring and lower value does not.
- Explains why equality marks the stopping point.
### Remember
Stop adding labor when the next worker's added income just matches the worker's wage.
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