Question

Explain how a competitive, profit-maximizing firm decides how much of each factor of production to demand.

Answer 1

Profit - maximizing firm is the one which tries to make maximum profits, it produces output at the level at which marginal revenue of the firm is equal to it's marginal cost. And in a competitive firm marginal revenue is equal to market price. Thus, a competitive, profit maximizing firm produces at the level at which price equals to marginal cost.

Since employing labour increases the level of production which then leads to increament in revenue. This firm always compare the additional benefits from hiring labour to it's additional cost of hiring it. Thus, a competitive profit maximizing firm hires factors of production up to the point at which its On which the value of the marginal product of factor equal its price.