Answer to Question #112473 in Macroeconomics for Rabia Khan

Question

Explain the relationship between profit maximization condition and the labor demand as shown by equation
MPNi=W/P

Answer 1

For a firm that hires labor as the variable input, the optimal profit occurs at the point where the marginal product of labor is equal to the real wage.

Therefore, the labor demand equation $MPN = \frac{W}{P}$ gives the different quantities of labor that a firm should hire at different wage rates in order to maximize its profits.