The Equimarginal Principle, Again

By taking the marginal approach -- the bug's-eye view -- we have discovered the diagnostic rule for maximum profits. The way to maximize profits then is to hire enough labor so that

VMP=wage

where p is the price of output and VMP = p*MP the marginal productivity of labor in money terms.

This is another instance of the Equimarginal Principle. The rule tells us that profits are not maximized until we have adjusted the labor input so that the marginal product in labor, in dollar terms, is equal to the wage. Since the wage is the amount that the additional (marginal) unit of labor adds to cost, we could think of the wage as the "marginal cost" of labor and express the rule as "value of marginal product of labor equal to marginal cost." But we will give a more compete and careful definition of marginal cost (of output) in the next chapter.