Marginal Revenue Product

Definition

Marginal revenue product (MRP) is the additional revenue a firm can generate by employing one more unit of a variable input, such as labor. It represents the value of the extra output produced by that additional unit of input. MRP is a crucial concept in understanding how firms make decisions about hiring and employment in imperfectly competitive labor markets, bilateral monopolies, and the factors contributing to income inequality.

5 Must Know Facts For Your Next Test

1. Firms will continue to hire additional workers as long as the marginal revenue product of the last worker hired exceeds the wage rate, as this will increase the firm's profits.
2. In an imperfectly competitive labor market, the firm's demand for labor is determined by the marginal revenue product of labor, not the market wage rate.
3. In a bilateral monopoly, the outcome depends on the relative bargaining power of the monopolistic employer and the monopolistic labor union, which is influenced by the marginal revenue product of labor.
4. Income inequality can be partly explained by differences in the marginal revenue product of different types of labor, with more productive workers earning higher wages.
5. Technological change and globalization can affect the marginal revenue product of different types of labor, contributing to changes in income inequality over time.

Review Questions

• Explain how a firm's demand for labor is determined by the marginal revenue product of labor in an imperfectly competitive labor market.
  • In an imperfectly competitive labor market, the firm's demand for labor is determined by the marginal revenue product of labor, rather than the market wage rate. The firm will continue to hire additional workers as long as the marginal revenue product of the last worker hired exceeds the wage rate, as this will increase the firm's profits. The firm's demand for labor is downward-sloping, and the wage rate will be lower than the value of the marginal product of labor.
• Describe the role of marginal revenue product in the outcome of a bilateral monopoly.
  • In a bilateral monopoly, where there is a monopolistic employer and a monopolistic labor union, the outcome depends on the relative bargaining power of the two parties. This bargaining power is influenced by the marginal revenue product of labor. The higher the marginal revenue product of labor, the more valuable the workers are to the employer, and the stronger the union's bargaining position. Conversely, a lower marginal revenue product of labor weakens the union's bargaining power, potentially leading to a lower wage rate.
• Analyze how changes in the marginal revenue product of different types of labor can contribute to income inequality.
  • Income inequality can be partly explained by differences in the marginal revenue product of different types of labor. Workers whose skills and abilities are in high demand and have a high marginal revenue product will earn higher wages, while those with a lower marginal revenue product will earn lower wages. Technological change and globalization can affect the marginal revenue product of different types of labor, leading to changes in income inequality over time. For example, the increasing marginal revenue product of highly skilled, technology-savvy workers can contribute to rising income inequality compared to workers with more routine, easily automatable tasks.

Related terms

Marginal Revenue: Marginal revenue is the change in total revenue resulting from the sale of one additional unit of a good or service.

Marginal Product: Marginal product is the change in total output that results from employing one additional unit of a variable input, such as labor.

Profit Maximization: Profit maximization is the goal of a firm to choose the level of output and input that results in the highest possible profit.