The Hiring Decision

The hiring decision deals with whether a firm should hire workers, fire workers, or maintain its current workforce. The desire to maximize profits helps firms determine the

Table 6.4 The Hiring Decision at Dan's Deli

1

Number of

2

Deli's Total

3

Marginal

4

Marginal Revenue

5

Marginal Factor

6

Profit or

Workers

Output

Product (MP)

Product (MRP)

Cost (MFC)

Loss

0

0

0

0

0

0

1

50

50

$250

$75

$175

2

110

60

$300

$75

$225

3

130

20

$100

$75

$25

4

145

15

$75

$75

0

5

150

5

$25

$75

-$50

number of workers to employ. The core hiring principle for a profit-maximizing business is that the firm will employ an additional worker only if the additional revenue generated by this worker is greater than or equal to the additional cost of the worker, namely, the worker's wage. In the language of the economist, a firm will hire a worker if the marginal revenue product (MRP) is greater than or equal to the marginal factor cost (MFC). Consider the hiring decision for Dan's Deli, as shown in Table 6.4. For this case, assume that the price of a sandwich produced at the deli is $5 and that the daily wage of $75 per worker is the only cost of production.

Table 6.4 shows that Dan's Deli could hire from one to five workers. If the firm hires one worker (column 1), the deli produces 50 sandwiches (column 2). The additional output, called the marginal product (MP), is also 50 sandwiches (column 3) because production jumped from 0 to 50 as a result of hiring the first worker. Recall that the word “marginal” means additional, or the next. Hence, the marginal product is the additional output that results from hiring each worker. The marginal revenue product (MRP) is the additional revenue earned by the firm because of this first worker, in this case $250 (column 4). This is because 50 sandwiches are sold at a price of $5 per sandwich. The marginal factor cost (MFC) is the daily $75 wage for each worker (column 5). The MFC represents the additional cost for each factor of production (each worker) hired by the firm. When the first worker is hired, Dan's Deli earns a profit of $175 (column 6). This is because the marginal revenue product ($250) generated by the first worker is greater than the marginal factor cost ($75) of this worker.

Table 6.4 shows that Dan's Deli earns additional profits when the first (þ$175), second (þ$225), and third workers (þ$25) are hired. Thus, to maximize profits Dan's Deli would certainly hire the first three workers. The fourth worker's MRP of $75 is equal to this worker's MFC of $75. Should this fourth worker be hired? Economists support the hiring of the fourth worker, even though the firm earns zero profit from this worker. The hiring of the fourth worker sends an invisible signal to the firm to stop hiring at this point, however. The fifth worker shown in Table 6.4 should not be hired because this fifth worker generates just $25 in additional revenue but costs the firm $75 in wages—a net loss of $50 per day. Economists conclude that the profit-maximizing firm should hire additional workers up to and including the point where the MRP ¼ MFC.

Some hiring decisions have stirred controversy in recent years. For example, some people wonder why chief executive officers (CEOs) for major corporations collect multimilliondollar wage and bonus packages even when their corporations suffer losses. Others marvel at the yearly wage and bonus packages of highly paid professional athletes and entertainers.

Questions about what constitutes fair compensation for our modern-day captains of industry and other celebrities help illustrate the difficulties of applying the hiring decision to certain occupations.

 
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