If the MPL is three t-shirts the first will hire more workers until the MPL reaches two if the MPL is one t-shirt then the firm will remove workers until the MPL reaches two. “For example, if a firm can sell t-shirts for $10 each and the wage rate is $20/hour, the firm will continue to hire workers until the marginal product of an additional hour of work is two t-shirts. Theory states that a profit maximizing firm will hire workers up to the point where the marginal revenue product is equal to the wage rate, because it is not efficient for a firm to pay its workers more than it will earn in revenues from their labor. This can be used to determine the optimal number of workers to employ at an exogenously determined market wage rate. The marginal revenue product of a worker is equal to the product of the marginal product of labor (MPL) and the marginal revenue (MR) of output, given by MR×MPL = MRPL. “The marginal revenue product of labor (MRPL) is the change in revenue that results from employing an additional unit of labor, holding all other inputs constant.
Relation to marginal productīoundless (reference below) explains the relationship between the marginal product of labour and the marginal revenue of output as follows. NOTE: Some authors (see Alex Tabarrok in the video link opposite and reference below) use the term marginal product of labour (measured in units of currency) synonymously with marginal revenue product of labour, while others (see descriptions below) use it as a quantity of output that must be multiplied by the marginal revenue of output to equate to the marginal revenue product of labour. Hence, this option is the correct answer.The marginal revenue product of labour is the change in revenue that results from employing an additional unit of labour. This further causes the MRP to decline as it is the product of MPP and MR, and when MR is unchanged, then a decline in MPP due to more labor employed will cause a reduction in the MRP. The hiring of more laborers by the firms, without altering any other input, will reduce the MPP of labor. Owing to this, both the MRP and labor demand curve are the same. Also, the number of laborers demanded increases when there is a decline in the wage rate. As the number of labor employed increases, the MPP decreases which in turn decreases the MRP. The wage rate paid by each firm equals the MRP generated by the labor units implying that the MRP curve is also the labor demand curve. The demand curve for labor determines the different quantities of labor units that a firm hires at varying wage rates. Since MRP is the product of MPP and MR, the rise in MR, keeping MPP unchanged, will result in an increase in the magnitude of MRP. The rise in price will increase the MR earned by the firm.
MR is the extra revenue earned by selling a unit of the output. MPP =, where Y is the output and L is labor. Where MPP is the additional output produced by employing one more unit of labor. It is calculated as the product of the marginal physical product(MPP) of labor and the marginal revenue(MR). The marginal revenue product(MRP) of labor is the marginal revenue(MR) generated by employing one more unit of labor in the production process.
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