The Two Rules Lead to the Same Outcome In the chapter on competitive output markets we learned that profitmaximizing firms will increase output so long as doing so adds more to revenue than to cost, or up to the point where marginal revenue, which in perfect competition is the same as the market-determined price, equals marginal cost In this chapter we have learned that profit-maximizing firms will hire labor up to the point where marginal revenue product equals marginal factor cost Is it possible that a firm that follows the marginal decision rule for hiring labor would end up producing a different quantity of output compared to the quantity of output it would choose if it followed the marginal decision rule for deciding directly how much output to produce? Is there a conflict between these two marginal decision rules? The answer is no These two marginal decision rules are really just two ways of saying the same thing: one rule is in terms of quantity of output and the other in terms of the quantity of factors required to produce that quantity of output Hiring an additional unit of a factor means producing a certain amount of additional output Using the example of TeleTax, at $150 per accountant per night, we found that Ms Lancaster maximizes profit by hiring five accountants The MPL of the fifth accountant is ΔQ; it is 17 At five accountants, the marginal cost of a call is ΔTC/ΔQ = $150/17 = $8.82, which is less than the price of $10 per call, so hiring that accountant adds to her profit At six accountants, the marginal cost of a call would be $150/13 = $11.54, which is greater than the $10 price, so hiring a sixth accountant would lower profit The profitmaximizing output of 93 calls, found by comparing marginal cost and price, is thus consistent with the profit-maximizing quantity of labor of five Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 633