Mr Smith's Firm Competes in a Perfectly Competitive Market

question 59

Multiple Choice

Mr. Smith's firm competes in a perfectly competitive market. The firm is currently hiring 30 workers. The value of marginal product of the last worker is $7.00 per hour. The wage rate is $8.00 per hour. To increase profit, Mr. Smith should

• A)continue hiring 30 workers because the firm earns a surplus of $1.00 on each worker hired.
• B)increase the price of the firm's product so that the value of marginal product increases to $8.00 per hour.
• C)decrease the price of the firm's product so that the value of marginal product increases to $8.00 per hour.
• D)decrease the number of workers until the value of marginal product of labour equals $8.00.
• E)increase the number of workers until the value of marginal product of labour equals $8.00.

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Definitions:

Net Present Value (NPV)

Net Present Value is a method used in capital budgeting to evaluate the profitability of an investment or project, calculating the present value of all cash inflows and outflows using a specified discount rate.

Internal Rate of Return (IRR)

The discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero, used in capital budgeting to estimate the profitability of potential investments.

Payback Method

An investment appraisal technique that calculates the time needed for an investment to generate cash flows sufficient to recover the initial cost.

Weighted Average Cost of Capital (WACC)

A calculation of a company's cost of capital in which each category of capital (debt, equity) is proportionally weighted.