Q.A firm operating under perfect competition sells its product at ₹10 per unit. The marginal physical product (MPP) schedule of labour is: 1st worker = 10 units, 2nd worker = 8 units, 3rd worker = 6 units, 4th worker = 4 units, 5th worker = 2 units. If the market wage rate is ₹40 per worker, how many workers will the firm employ according to the marginal productivity theory?

This question applies the marginal productivity employment rule — a firm keeps hiring a factor as long as its marginal revenue product (MRP) is at least equal to the factor's price.

Step 1 — Compute MRP for each worker. Since the firm operates under perfect competition, marginal revenue (MR) equals the market price of ₹10 for every unit sold. MRP is calculated as $MRP = MPP \times MR$:

Step 2 — Apply the employment rule. A profit-maximising firm hires a worker as long as that worker's MRP is at least equal to the wage rate (₹40 here), because hiring is profitable whenever the extra revenue generated covers the extra wage cost.

Step 3 — Determine the cut-off. Workers 1 through 4 all have MRP ≥ ₹40 (₹100, ₹80, ₹60, and ₹40 respectively), so hiring each of them is worthwhile. The 5th worker's MRP is only ₹20, which is less than the ₹40 wage — hiring this worker would cost more than the revenue gained, so the firm stops before hiring the 5th worker. …

Step 1: Since the firm operates under perfect competition, MR = Price = ₹10 for every unit sold. Step 2: Compute MRP = MPP × MR for each worker: Worker 1: 10×10=₹100; Worker 2: 8×10=₹80; Worker 3: 6×10=₹60; Worker 4: 4×10=₹40; Worker 5: 2×10=₹20. Step 3: Apply the employment rule — hire a worker as long as MRP ≥ wage rate (₹40). Workers 1-4 all satisfy MRP ≥ ₹40; Worker 5's MRP (₹20) is below ₹40, so the firm stops at 4 workers. Independently r …

A common mistake is to keep hiring as long as MPP (physical output) is positive, ignoring that what matters for the hiring decision is MRP compared with the wage rate in money terms. Another common error is forgetting that under perfect competition MR equals pri …