Question

Marginal revenue product measures the increase in a. output resulting from one more unit of labor. b. total revenue resulting from one more unit of output. c. revenue per unit from one more unit of output. d. total revenue resulting from one more unit of labor.

Short answer

d. Total revenue resulting from one more unit of labor.

Step-by-step solution

Option a: Output resulting from one more unit of labor

This option refers to the concept of marginal product, not marginal revenue product. The marginal product of labor measures the additional output generated by employing one more unit of labor, keeping other factors such as capital, technology, and management constant.

Option b: Total revenue resulting from one more unit of output

This option refers to the concept of marginal revenue, not marginal revenue product. Marginal revenue is the additional revenue obtained by selling one more unit of output.

Option c: Revenue per unit from one more unit of output

This option does not accurately describe marginal revenue product. It seems to mix two concepts: marginal revenue and average revenue. Average revenue is the revenue generated per each unit of output sold.

Option d: Total revenue resulting from one more unit of labor

This option correctly describes the concept of marginal revenue product. Marginal revenue product measures the additional total revenue generated from employing one more unit of labor, holding other factors such as capital, technology, and management constant. So, the correct answer is: d. Total revenue resulting from one more unit of labor.

Key concepts

Marginal Product of Labor

When we talk about the marginal product of labor, we're looking at how the production changes when we add one more worker to the team. This is a neat way to measure efficiency. If a factory hires another worker and production increases by a certain number of units, that's the marginal product of labor. Think of it as how much more we can produce with just one more person. To break it down:

• Definition: The extra output we get from hiring an additional worker.
• Constant Factors: It's important to hold other factors, like machines and technology, steady to isolate the effect of adding more labor.
• Significance: Helps businesses decide if hiring more workers is beneficial.

Understanding this concept helps companies optimize their labor costs and maximize efficiency, knowing when the addition of extra hands truly makes a difference.

Marginal Revenue

Marginal revenue is all about understanding the extra money a business makes when they sell one more unit of their product. This concept is critical for determining the optimal level of production. Here's what you need to know:

• Definition: The additional income from selling one more unit of a good or service.
• Calculation: Calculated by examining how total revenue changes as output changes.
• Business Strategy: Helps businesses understand pricing and sales volume to maximize profits.

By knowing the marginal revenue, companies can figure out the most profitable number of units to produce. If producing more keeps adding to total revenue, they might increase production. But when it starts decreasing, it's a hint to slow down.

Average Revenue

Average revenue is a straightforward concept that answers the question, "How much does each unit we sell bring in?"Here's how it works:

• Definition: The revenue earned per unit of output sold.
• Simple Calculation: Divide total revenue by the number of units sold. i.e., \( \text{Average Revenue} = \frac{\text{Total Revenue}}{\text{Quantity Sold}} \)
• Importance: In perfectly competitive markets, average revenue is typically equal to the price of the good.

Understanding average revenue helps businesses set prices and assess their competitive position in the market. When they know how much each sale contributes, they can make informed decisions about pricing, marketing, and product development.