2. Carefully explain why employers are willing to hire labor to the point at which the marginal product is equal to the real wage.
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The marginal product of labor shows how much output changes as an additional unit of labor is employed. The real wage shows how much an employer's variable costs change when an additional unit of labor is employed. If marginal product is greater than the real wage, the value of the output produced by an additional unit of labor will be greater than the cost of employing the additional unit and total profits will increase. If marginal product is less than the real wage, the value of the output produced by an additional unit of labor will be less than the cost of employing the additional unit and total profits will fall. Since total profits increase when marginal product exceeds the real wage, and total profits fall when marginal product is less than the real wage, total profits must be at a maximum when marginal product and the real wage are equal. Thus, in order to get the largest profits possible, firms will hire labor to the point at which marginal product and the real wage are equal.
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