Marginal revenue product (MRP) is the additional revenue a firm earns from employing one more unit of an input like labor; in a perfectly competitive output market, MRP = marginal product × output price, and profit-maximizing firms hire until MRP equals marginal resource cost (the wage).
Marginal revenue product (MRP) answers one question for a firm: "If I hire one more worker, how much extra money do I bring in?" It combines two things, how much extra output the worker produces (marginal product) and how much revenue that output sells for. When the firm sells in a perfectly competitive output market, the price never changes, so the formula is simple. MRP = marginal product × price.
MRP matters because it sets the hiring rule for Unit 5. A profit-maximizing firm hires workers as long as each one adds more revenue than they cost, and stops when MRP equals marginal resource cost (MRC). In a perfectly competitive labor market, MRC is just the market wage, so the rule becomes hire until MRP = wage. Because of diminishing marginal returns, MRP falls as you hire more workers, which is exactly why the labor demand curve slopes downward. The MRP curve IS the firm's demand curve for labor.
MRP lives in Topic 5.1, Introduction to Factor Markets, and it's the engine behind all of Unit 5. The CED asks you to define it (AP Micro 5.1.A), explain how it links firms to factor prices (AP Micro 5.1.B), and calculate it from a table or graph (AP Micro 5.1.C). It also embodies EK PRD-4.A.1, which says a firm's hiring decision depends on productivity, output price, and the cost of the factor. MRP packages the first two into one number you compare against the third. If you can build an MRP column from a production table and find where MRP = wage, you've handled the most predictable factor-market question on the exam.
Keep studying AP Microeconomics Unit 5
Marginal Product (Units 3 & 5)
Marginal product is the physical half of MRP. MP counts extra units of output; MRP converts those units into dollars by multiplying by price. Diminishing marginal returns from Unit 3 is the reason MRP falls as hiring rises.
Derived Demand (Unit 5)
Labor demand is derived from the demand for the product workers make. MRP is the math behind that idea. If the price of the firm's product rises, MRP rises at every quantity of labor, and the whole labor demand curve shifts right.
Demand for Labor (Unit 5)
For a competitive firm, the downward-sloping portion of the MRP curve is literally the labor demand curve. When an MCQ asks what shifts labor demand, it's really asking what changes MRP, so the answers are productivity or output price.
Profit Maximization, MR = MC (Unit 3)
MRP = MRC is the factor-market twin of MR = MC. In the output market you compare extra revenue and extra cost per unit of output; in the factor market you compare them per unit of input. Same logic, different axis.
MRP shows up constantly, in both multiple choice and the short FRQ. Released FRQs from 2021 (Schmitt Inc.'s parking lot) and 2023 (Keepdry's rain jackets) hand you a perfectly competitive firm with an output price and a wage, then make you calculate MRP from a marginal product table and identify the profit-maximizing number of workers. The move is always the same. Multiply MP by price to get MRP, then hire every worker whose MRP is at least the wage. MCQs test the hiring rule directly ("what leads a profit-maximizing owner to hire another worker?") and push into the monopsony case, where the firm still hires where MRP = MRC but MRC rises above the wage. You may also see minimum wage questions where a wage set above equilibrium means fewer workers have MRP high enough to justify hiring them.
Marginal product (MP) is measured in units of output, like 5 extra jackets from the next worker. Marginal revenue product (MRP) is measured in dollars, the revenue those jackets bring in. The fastest exam check is the units. If the answer should be in dollars, you need MRP, which means you must multiply MP by the output price. Students lose easy FRQ points by reporting MP when the question asks for MRP.
Marginal revenue product is the extra revenue a firm gains from hiring one more unit of an input, calculated as marginal product times output price when the product market is perfectly competitive.
A profit-maximizing firm hires inputs until MRP equals marginal resource cost, which in a perfectly competitive labor market is simply the market wage.
MRP falls as more workers are hired because of diminishing marginal returns, and that falling MRP curve is the firm's demand curve for labor.
Anything that raises productivity or the output price raises MRP and shifts labor demand to the right, which is the mechanism behind derived demand.
On FRQs, build the MRP column from the marginal product table first, then compare each worker's MRP to the wage to find the profit-maximizing quantity of labor.
MRP is the additional revenue a firm earns from employing one more unit of a factor, usually labor. For a firm selling in a perfectly competitive market, MRP equals marginal product multiplied by the output price.
Multiply the marginal product of the input by the price of the output. If the third worker at Keepdry produces 4 jackets that sell for $5 each, that worker's MRP is $20.
No. Marginal product is the extra output (a quantity of goods), while MRP is the extra revenue (dollars). You get MRP by multiplying MP by the output price, so mixing them up costs points on calculation FRQs.
Because each worker whose MRP exceeds the wage adds more to revenue than to cost, so hiring them raises profit. Once MRP falls to the wage, the next worker would cost more than they bring in, so the firm stops there.
Yes, the rule itself holds, but for a monopsonist MRC lies above the wage because hiring another worker raises the wage paid to everyone. The monopsonist hires where MRP = MRC, then pays the lower wage off the supply curve, so it hires fewer workers than a competitive market would.