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Marginal revenue product
Marginal revenue product is the additional revenue generated by adding one more unit of input.
The marginal revenue product is calculated by multiplying together the marginal physical product (the extra output produced) by the marginal revenue (the extra revenue earned). The result is the value of the output produced to the firm.
The additional revenue generated by the extra output from employing one more unit of a
of production. In a competitive industry this equals the
marginal value product
, but with
it is smaller, due to the implied price reduction. Determines factor prices in competitive factor markets.
Wikipedia describes the definition of Marginal revenue productivity theory of wages, also referred to as the marginal revenue product of labor, is the change in total revenue earned by a firm that results from employing one more unit of labor. It is a neoclassical model that determines, under some conditions, the optimal number of workers to employ at an exogenously determined market wage rate.
The marginal revenue product (MRP) of a worker is equal to the product of the marginal product of labor (MP) and the marginal revenue (MR), given by MR.MP = MRP. The theory states that workers will be hired up to the point where the MRP is equal to the wage rate by a maximizing firm because it is not efficient for a firm to pay its workers more than it will earn in profits from their labor. (wikipedia)
marginal physical product
is the extra output produced by one more unit of an input (for instance, the difference in output when a firm's labour is increased from five to six units). Assuming that no other inputs to production change, the marginal product of a given input (
) can be expressed:
(the change of
)/(the change of
This is the mathematical derivative of the production function. Note that the "product" (Y) is typically defined ignoring external costs and benefits. In the "law" of diminishing marginal returns, the marginal product of one input is assumed to fall as long as some other input to production does not change. (Wikipedia)
The neoclassical theory of competitive markets says that the marginal product of labor equals the real wage. In aggregate models of perfect competition, in which a single good is produced and that good is used both in consumption and as a capital good, the marginal product of capital equals its rate of return. As was shown in the Cambridge capital controversy, this proposition about the marginal product of capital cannot generally be sustained in multicommodity models in which capital and consumption goods are distinguished. (Wikipedia)
Marginal product is the slope of the total product curve and is given by:
MP = Total product Quantity of labor units (Wikipedia)
Marginal revenue productivity (MRP) is a theory of wages where workers are paid the value of their marginal revenue product to the firm.
This theory suggests that wage differentials result from differences in labour productivity and the value of the output that the labour input produces. (tutor2u.com)
MRP theory is based on a competitive labor market and the theory rests on a number of key assumptions that are unlikely to exist in the real world.(tutor2u.com) Most labor markets are not perfect, which is one thing that leads to wage differences depending on occupation. The following is a list of assumptions of the competitive labor market:
Workers are homogeneous
Firms have no buying power when demanding workers
There are no trade unions
The productivity of each worker can be clearly measured
The supply of labor is perfectly elastic. Workers are occupationally and geographically mobile and can be hired at a constant wage rate
Marginal Revenue Product (MRP) measures the change in total revenue for a firm as a result of selling the output produced by an extra worker.
The isocost line shows the different combinations of labor and capital that will cost the producer the same amount. It is downward sloping and the formula is as follows: K = C/r - w/r(L)
The slope can be found by: Slope = -w/r
Vertical intercept = C/r
wage rate, r = rental rate (price of capital)
MRP = Marginal Physical Product x Price of Output per unit
1. Marginal Revenue Productivity assumes that:
a.) Workers are heterogeneous or differentiated
b.) Unions exist
c.) The supply of labor is perfectly elastic
d.) The supply of labor is inelastic
Answer: C. The assumption is that the labor supply is perfectly elastic. This is due to assumptions that the rate of wage is constant regardless of location or expertise and that there is not a shortage of qualified workers available in the location that they would be needed in.
2. Assuming the that work is split between labor and machinery, the law of diminishing marginal returns gives the marginal revenue product curve a:
a.) Negative slope
b.) Positive slope
c.) Either a positive or a negative slope
Answer: A. As less of one input is used, increasing amount of another input must be employed to produce the same level of output.
3. The line that represents the combinations of inputs that will cost the producer the same amount of money is the:
a.) Isoquant line
b.) Isocost line
c.) None of the above
d.) Either A or B
Answer: Isocost line
4.) True or False: To maximize profit, a firm will use a resource in an amount at which the resources marginal revenue product equals its marginal resource cost. True
5.) The productivity of any resource may be alteed by the following except:
a.) Quantities of other resources
b.) Quality of variable resources
c.) Net effect
d.) Technologial advance
Answer: C. Net effect is the only variable that does not directly affect the actual production rate or capability. All other choices can speed up or slow down production.
. Retrieved from the web March 1, 2007.
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