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.
Formula
MRP = MP × P (competitive output market) = ΔTR ÷ Δlabor. Hire until MRP = wage (MRC).
Steps
- 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
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.
Frequently asked 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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