Marginal revenue product of labour

Another important factor that influences the decision of a firm to employ labour is the productivity of labour.

The following table is based on the example of the Blaker Maker that we used when we explained the cost of production.

Total and marginal product

Variable input
labour		 Total product (TP) Marginal product (MP)
0 0 ---
1 500 500
2 1 500 1000
3 3 000 1500
4 4 000 1000
5 4 500 500
6 4 750 250
7 4 750 0

Study the above table and answer the following questions:

  • What happens to total product as more labour are employed?
  • What happens to marginal product as more labour are employed?
  • What is the reason for the way marginal product behaves?
Click to Show Answer

As you can see, total product increases as more units of labour are employed but the marginal product of labour eventually decreases. The reason for this is the law of diminishing returns. If you are not sure what this law is about, revise it before you continue.

A firm like Blaker Maker is interested in the contribution units of labour make to its total revenue and profits. The firm needs this information to be able to decide whether it is profitable to employ an additional unit of labour. This contribution to total revenue by an additional unit of labour is called the marginal revenue product of labour.

To calculate the marginal revenue product of labour, we need the marginal product of labour and the market price for the goods or services that are produced. By multiplying the marginal product of labour (MP) with the price of the good or service (P), we obtain the marginal revenue product of labour (MRP).

$$\text{Marginal revenue product of labour} = {\text{Marginal product of labour multiplied by the market price}}$$

$$\text{MRP} = {\text{MP} \times{P}}$$

If the price of a garden ornament is R5, we can calculate the marginal revenue product of labour by multiplying the marginal product by R5. This is indicated in the following table for the first three units of labour:

Marginal revenue product of labour

Variable input
labour		 Total product (TP) Marginal product (MP) Price
(P)		 Marginal revenue product
(MRP)
0 0 --- R5 ---
1 500 500 R5 R2 500
2 1 500 1000 R5 R 5 000
3 3 000 1500 R5 R7 500
4 4 000 1000 R5  
5 4 500 500 R5  
6 4 750 250 R5  
7 4 750 0 R5  

Complete the above table by calculating the marginal revenue product for the rest of the labour units.

Click to Show Answer

As you can see from the following table, the marginal revenue product of labour declines as more units of labour are employed.

Marginal revenue product of labour

Variable input
labour		 Total product (TP) Marginal product (MP) Price
(P)		 Marginal revenue product
(MRP)
0 0 --- R5 ---
1 500 500 R5 R2 500
2 1 500 1000 R5 R 5 000
3 3 000 1500 R5 R7 500
4 4 000 1000 R5 R5 000
5 4 500 500 R5 R 2 500
6 4 750 250 R5 R1 250
7 4 750 0 R5 0

Activity

Indicate whether the following statements relating to marginal revenue product is true or false:

Marginal revenue represents the cost of employing an additional unit of labour.

Incorrect. The statement is false. Marginal revenue of labour represents the contribution of an additional unit of labour to total revenue.

Correct. The statement is false. Marginal revenue of labour represents the contribution of an additional unit of labour to total revenue.

The marginal revenue product (MRP) is obtained by the multiplying marginal product (MP) by the market price of the product in question.

Correct. The statement is true. Marginal revenue product of labour = marginal product of labour x market price.

Incorrect. The statement is true. Marginal revenue product of labour = marginal product of labour x market price.

If the market price of the product stays the same, the marginal revenue product increases as more units of labour are employed.

Incorrect. The statement is false. If the price stays the same, the marginal revenue product of labour will decline as more units of labour are employed.

Correct. The statement is false. If the price stays the same, the marginal revenue product of labour will decline as more units of labour are employed.

Complete the following table:

Units of labour Total product (pairs of shoes)
(TP)		 Marginal product (pairs of shoes)
(MPP)		 Price per pair of shoes

(R)

 Marginal revenue product
(MRP)
0 0 --- 70  
1 12 12 70  
2 22 10 70  
3 31 9 70  
4 36 5 70  
5 40 4 70  
6 42 2 70  
Click to Show Answer
Units of labour Total product (pairs of shoes)
(TP)		 Marginal product (pairs of shoes)
(MPP)		 Price per pair of shoes

(R)

 Marginal revenue product
(MRP)
0 0 0 70 0
1 12 12 70 840
2 22 10 70 700
3 31 9 70 630
4 36 5 70 350
5 40 4 70 280
6 42 2 70 140

Choose the correct term in brackets:

As more units of labour are employed, the total product (rises, falls), the marginal product (rises, falls) and the marginal revenue product (rises, falls).

Correct.  The total product rises.

Incorrect.  The total product rises.

Incorrect.  The marginal product falls.

Correct.  The marginal product falls.

Incorrect.  The marginal product falls.

Correct.  Marginal revenue product falls.

Assume the price of a pair of shoes increases to R80.

a. What happens to the total product of four units of labour?
b. What happens to the marginal product of the fourth unit of labour?
c. What happens to the marginal revenue product of the fourth unit of labour?

Click to Show Answer

a. The marginal product is unchanged.
b. The marginal product of the fourth worker is unchanged.
c. The marginal revenue product of the fourth unit of labour increase from R350 to R400 (5 x R80).