University of Central Florida (UCF) ECO2013 Principles of Macroeconomics Practice Exam 3

Firms decide to hire additional workers based on the principle of evaluating the marginal benefit against the marginal cost. This involves analyzing whether the additional output produced by hiring one more worker (marginal benefit) exceeds the additional cost of hiring that worker (marginal cost, which mainly includes wages and associated expenses).

If the increase in production that results from hiring an additional worker leads to higher revenue that surpasses the cost of employing that worker, it makes sense for the firm to proceed with the hire. This decision-making process ensures that firms maximize their profits and operate efficiently by only bringing on additional labor when it enhances productivity and overall profitability.

While assessing total production costs is important for understanding the financial landscape of the firm, it doesn't directly guide the specific decision of hiring additional workers. Comparing nominal wages to real wages may help firms understand labor market conditions, but it does not directly factor into the marginal analysis that drives hiring decisions. Similarly, while the total number of applicants might provide some context, it does not specifically address the economic rationale behind the decision to hire. Therefore, the most relevant and accurate way firms make hiring decisions is through the comparison of marginal benefits and costs.