What is the relationship between marginal product and wage according to labor hiring decisions?

The relationship between marginal product and wage is a fundamental concept in labor economics, particularly in the context of how firms make hiring decisions. Firms aim to maximize their profits, and one way they do this is by efficiently employing labor.

When analyzing hiring decisions, a firm will continue to hire additional workers as long as the marginal product of the labor—meaning the additional output generated by hiring one more worker—exceeds or equals the wage paid to that worker. This is because hiring an additional worker is only worthwhile if the revenue generated by that worker's output is greater than or equal to their cost (the wage).

Once the marginal product of labor is less than the wage, it indicates that the cost of hiring an additional worker surpasses the value of the output they produce, prompting the firm to stop hiring. Therefore, the optimal point for a firm hiring labor is when the marginal product of labor is precisely equal to the wage being paid. This maximization technique helps firms determine the optimal amount of labor to employ.

Through this principle, it becomes clear that hiring decisions are directly tied to the comparison between the marginal product of labor and the wage, justifying why the correct answer reflects this equilibrium point.