Marginal Resource Cost
What is Marginal Resource Cost?
Marginal Resource Cost (MRC) is the additional cost a firm incurs by employing one more unit of a factor of production.
MRC is the change in total cost from hiring one more unit of a factor, such as labor. It includes all additional costs, not just the factor's price. Firms hire a factor up to the point where its MRP equals its MRC. In a perfectly competitive factor market the firm faces a horizontal factor supply curve and MRC equals the market price; under monopsony, MRC lies above the upward-sloping supply curve.
Marginal Resource Cost: a worked example
A cannery is the only employer in town, so it has to raise the wage for everyone to attract another worker. At $20 an hour, 5 people are willing to work and total hourly labor cost is 5 x 20 = $100. Getting a 6th means posting $22, so the bill becomes 6 x 22 = $132. MRC is 132 - 100 = $32, far above the $22 the new hire earns, because the firm also gives $2 more to each of the 5 already there, which adds $10. In a competitive labor market, where the firm hires all it wants at $20, MRC would simply be $20.
The mistake students make with marginal resource cost
Because textbook problems usually place the firm in a competitive labor market, students memorize MRC equals the wage and carry that into monopsony questions. There MRC sits above the supply curve, since raising pay for the last worker raises pay for every earlier worker too. The related graph error is reading the monopsony wage off the MRC curve. Find the quantity where MRP meets MRC, then drop straight down to the supply curve to read the wage.
Marginal Resource Cost questions
How do you calculate marginal resource cost from a table?
Marginal resource cost is found by taking total factor cost at each quantity and subtracting the row above it. If total labor cost is $90 for 3 workers and $128 for 4, the MRC of the fourth worker is 128 - 90 = $38. Do not divide total cost by the number of workers, since that gives average cost, which here is only $32.
Is marginal resource cost the same as the wage?
Marginal resource cost equals the wage only when a firm can hire as many workers as it likes without bidding pay up, which is the perfectly competitive case. A firm with monopsony power faces an upward sloping supply of labor, so each extra worker costs the new wage plus the raise handed to everyone already employed, and MRC ends up above the wage.
What is the difference between MRC and MRP?
Marginal resource cost is what one more unit of an input costs the firm, while marginal revenue product is what that unit brings in. They are the factor-market versions of marginal cost and marginal revenue, and the hiring rule has the same shape: keep hiring while MRP sits above MRC, and stop at the quantity where the two are equal.
Formula / Example
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