Explain what is meant by marginal revenue products.
The marginal revenue product is the increase in total revenue resulting from the employment of each additional labour unit.
Marginal revenue product in a perfectly competitive market is equal to the price multiplied by the marginal revenue. Marginal revenue is the increase in revenue that results from the sale of one additional unit of output.
For example, the labour market is in equilibrium, wage rate equals marginal product of labour multiplied by price of product.
Given the MRPL curve, the number of workers to be employed will be determined by where MRPL = wage rate. For example, if wage rate is given at OW2 a profit maximizing firm will employ labour where OW2 = MRPL. This condition is fulfilled at point P, only OL number of workers will be employed. When wages go down to OW1, more workers are employed, but if wages go down OW2 to OW1 and employers still employ only OL workers, they will lose possible revenue equal to area PQR.
