Diminishing Returns and the Optimal Quantity of Labor

• The firm uses the marginal principle to decide how many workers to hire.

• The firm will pick the quantity of labor at which the marginal benefit of labor equals the marginal cost of labor.

Marginal PRINCIPLEIncrease the level of an activity if its marginal benefit exceeds its marginal cost, but reduce the level if the marginal cost exceeds the marginal benefit. If possible, pick the level at which the marginal benefit equals the marginal cost.

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