Question

In 2009 General Motors(GM) announced that it would reduce employment by 21,000 workers. What does this decision reveal about how GM viewed its marginal revenue product(MRP) and marginal resource cost(MRC)? Why didn’t GM reduce employment by more than 21,000 workers? By fewer than 21,000 workers? Use the MRP and MRC to help you explain this scenario:

Answer 1

This decision reveals that for these 21000 workers, marginal resource cost (MRC) of these workers  were greater than the Marginal revenue product delivered by these workers. So, these number of workers were removed. An organization hires workers as long as the marginal revenue product produced by the worker, is equal or greater than the its own marginal resources cost. If MRC is greater than the MRP, then it creates losses to the organization. The same happened and organization had to reduce employment by 21000 workers.

Here, MRP = Increase in revenue when one additional worker is hired. It is calculated by number of units produced, multiplied by the revenue per unit of the product

MRC = It is the additional cost incurred, due to the hiring of one more unit of workers or input

Once MRC is greater than MRP, then loss incurred and firm starts reducing its worker base.