How to Calculate Marginal Revenue Product (MRP)
Marginal revenue product equals marginal product times the product's price: MRP = MP × P. A firm hires workers while MRP is at least the wage.
The Marginal Revenue Product formula
Calculator
Enter the output an extra worker adds, the product price and the wage to get MRP and a hire call.
Output with the existing workers: 100 units in the worked example.
Usually 1, the single additional worker being evaluated.
The competitive output price each extra unit sells for.
The marginal resource cost of the worker over the same period. The example's break-even wage is $60.
The extra labor adds 12 units of output worth $60, so the worker is worth hiring at any wage up to $60, and the firm stops hiring where MRP equals the wage.
- Marginal product (MP)
- 12
- MRP minus the wage
- $0
- Hiring decision
- Hire, MRP = wage (the last worker worth hiring)
How to calculate Marginal Revenue Product, step by step
- 1Find the marginal product of the worker. MP = the extra output from hiring one more worker.
- 2Multiply by the product price. MRP = MP × P when the firm sells in a competitive market. (In general, MRP = ΔTR ÷ Δlabor.)
- 3Compare to the wage. Hire the worker if MRP ≥ wage; the profit-maximizing quantity of labor is where MRP = MRC (the wage in a competitive labor market).
Worked example: Marginal Revenue Product
Hiring a 4th worker raises output from 100 to 112 units, and each unit sells for $5: MP = 12, so MRP = 12 × 5 = $60. At any wage up to $60 per day, the 4th worker is worth hiring.
Marginal Revenue Product questions
Why does MRP fall as more workers are hired?
Diminishing marginal returns: with fixed capital, each added worker contributes less extra output, so each adds less extra revenue.
Why is labor demand called a derived demand?
Firms want workers only because consumers want the product, labor demand is derived from product demand, which is why MRP depends on the product's price.
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