Definition
The Marginal Revenue Product (MRP) is a measure in economics that represents the additional revenue a firm expects to earn from employing one more unit of input. It is calculated by multiplying the marginal product of the input (i.e., the additional output produced by one more unit of input) by the marginal revenue (i.e., the additional revenue received from selling the additional output).
\[ \text{MRP} = \text{Marginal Product} \times \text{Marginal Revenue} \]
For Example: If an additional unit of labor produces 0.3 units of output, and each unit of output is sold for $100, then the marginal revenue product of the labor would be:
\[ \text{MRP} = 0.3 \times 100 = $30 \]
Examples
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Manufacturing Sector: A factory employs additional workers to increase the production of widgets. If each extra worker produces 5 additional widgets and each widget sells for $20, the MRP of hiring another worker is \( 5 \times 20 = $100 \).
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Agriculture: A farmer adds more fertilizer to his field, and this results in more crops being produced. If every additional unit of fertilizer increases the crop yield by 2 kilograms and each kilogram is sold for $5, then the MRP of the additional fertilizer is \( 2 \times 5 = $10 \).
Frequently Asked Questions (FAQs)
What is Marginal Product?
Marginal Product (MP) refers to the additional output generated from employing one more unit of a particular input while keeping other inputs constant.
What is Marginal Revenue?
Marginal Revenue (MR) is the additional income obtained from selling one more unit of a good or service.
How does MRP impact hiring decisions?
Firms use MRP to decide how many additional units of an input to hire. If the cost of the additional input is less than the MRP, the firm will benefit from hiring additional units.
Yes, MRP can be applied to both labor and capital inputs, providing a basis for deciding the optimal allocation of resources.
What if the marginal revenue decreases?
If marginal revenue decreases, the MRP will also decrease, which could lead a company to hire fewer additional units of input.
- Marginal Cost (MC): The cost associated with producing one additional unit of output.
- Average Revenue (AR): The revenue gained per unit of output sold, calculated as total revenue divided by the number of units sold.
- Law of Diminishing Marginal Returns: An economic principle stating that as additional units of input are added to a process, the added output will eventually decrease after reaching a certain point.
- Production Function: A mathematical relationship expressing the output produced by a firm for given inputs of capital and labor.
Online References
Suggested Books for Further Studies
- “Principles of Economics” by N. Gregory Mankiw
- “Microeconomics” by Paul Krugman and Robin Wells
- “Economics: Principles, Problems, & Policies” by Campbell R. McConnell, Stanley L. Brue, and Sean M. Flynn
- “Intermediate Microeconomics: A Modern Approach” by Hal R. Varian
Fundamentals of Marginal Revenue Product: Economics Basics Quiz
### What does MRP stand for in economics?
- [ ] Market Revenue Productivity
- [ ] Marginal Revenue Product
- [ ] Maximum Revenue Probability
- [x] Marginal Revenue Product
> **Explanation:** MRP stands for Marginal Revenue Product, which calculates the additional revenue a firm receives from employing one more unit of input by multiplying its marginal product with marginal revenue.
### How do you calculate Marginal Revenue Product?
- [ ] Total Revenue / Total Inputs
- [ ] Marginal Cost × Marginal Revenue
- [x] Marginal Product × Marginal Revenue
- [ ] Total Product × Total Revenue
> **Explanation:** MRP is calculated as the product of the marginal product of an input and the marginal revenue generated by selling the additional output.
### If a firm's MRP for labor is $50, should it hire another worker if the cost is $45?
- [ ] No, because the cost is too high.
- [x] Yes, because the MRP is higher than the cost.
- [ ] No, because MRP should be less than the cost.
- [ ] Only if MRP equals the cost.
> **Explanation:** The firm should hire another worker because the MRP ($50) exceeds the cost of hiring the worker ($45), leading to an increase in profit.
### Which economic principle describes the phenomenon where additional input results in a smaller increase in output?
- [ ] Law of Supply
- [ ] Law of Demand
- [x] Law of Diminishing Marginal Returns
- [ ] Law of Marginal Utility
> **Explanation:** The Law of Diminishing Marginal Returns states that as more units of an input are added, the resulting increase in output will eventually decrease after a certain point.
### What happens to MRP if the marginal revenue decreases but the marginal product remains the same?
- [ ] MRP increases
- [x] MRP decreases
- [ ] MRP remains constant
- [ ] It depends on the input cost
> **Explanation:** If marginal revenue decreases while marginal product remains constant, MRP will decrease as MRP is the product of marginal product and marginal revenue.
### What is the outcome if the cost of an input surpasses the MRP?
- [x] The firm will reduce hiring that input
- [ ] The firm will hire more of that input
- [ ] The output will increase
- [ ] The revenue will double
> **Explanation:** If the cost of the input surpasses the MRP, the firm will reduce hiring that input as it would result in a loss rather than a profit.
### When can a firm achieve profit maximization in terms of MRP?
- [ ] When MRP equals zero
- [x] When MRP equals the cost of the input
- [ ] When MRP is double the input cost
- [ ] When the marginal product is maximized
> **Explanation:** A firm maximizes profit by employing additional inputs until the MRP equals the cost of the input, as this ensures that the cost of each additional input is covered by the revenue it generates.
### If the marginal product of an input decreases, what effect will it have on MRP?
- [x] MRP will decrease
- [ ] MRP will increase
- [ ] MRP remains unchanged
- [ ] MRP will double
> **Explanation:** If the marginal product of an input decreases, the MRP will decrease because the MRP is dependent on the marginal product of that input.
### Which factor is not directly part of calculating MRP?
- [x] Total Cost
- [ ] Marginal Product
- [ ] Marginal Revenue
- [ ] Input Utilization
> **Explanation:** Total Cost is not directly involved in the calculation of MRP. MRP is determined by multiplying the marginal product and the marginal revenue.
### What does a firm analyze using MRP when deciding to hire additional labor?
- [ ] Total Product of the firm
- [ ] Average Cost per worker
- [ ] Total Revenue for the next month
- [x] Additional revenue versus the cost of additional labor
> **Explanation:** A firm uses MRP to evaluate whether hiring additional labor will bring in more revenue than the labor's cost, thus guiding its hiring decisions.
Thank you for exploring Marginal Revenue Product in detail with this comprehensive guide and foundational economic quiz! Keep enhancing your understanding of economic principles to excel in your studies and career!
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