key term - Marginal Revenue Product of Labor

Definition

The marginal revenue product of labor (MRPL) is the additional revenue generated by hiring one more unit of labor. It represents the contribution of an additional worker to a firm's total revenue, and is a key factor in determining the optimal level of employment for a profit-maximizing firm in an imperfectly competitive labor market.

5 Must Know Facts For Your Next Test

1. The MRPL is the product of the firm's marginal revenue and the marginal product of labor.
2. In an imperfectly competitive labor market, a profit-maximizing firm will hire labor up to the point where the MRPL equals the wage rate.
3. If the MRPL is greater than the wage rate, the firm can increase profits by hiring more labor. If the MRPL is less than the wage rate, the firm can increase profits by reducing labor.
4. The MRPL curve slopes downward, reflecting the law of diminishing returns to labor, where each additional worker contributes less to revenue than the previous one.
5. Factors that can shift the MRPL curve include changes in product demand, the prices of other inputs, and the productivity of labor.

Review Questions

• Explain how the marginal revenue product of labor (MRPL) is determined and how it relates to a firm's employment decisions in an imperfectly competitive labor market.
  • The MRPL is determined by multiplying the firm's marginal revenue (the additional revenue from selling one more unit of output) and the marginal product of labor (the additional output produced by hiring one more unit of labor). In an imperfectly competitive labor market, a profit-maximizing firm will hire labor up to the point where the MRPL equals the wage rate. If the MRPL is greater than the wage rate, the firm can increase profits by hiring more labor. If the MRPL is less than the wage rate, the firm can increase profits by reducing labor.
• Analyze how changes in product demand or labor productivity can affect the MRPL and a firm's employment decisions in an imperfectly competitive labor market.
  • An increase in product demand will shift the MRPL curve to the right, as the firm can sell more output at a given price, increasing the marginal revenue. This will lead the firm to hire more labor, as the MRPL will be greater than the wage rate. Conversely, a decrease in product demand will shift the MRPL curve to the left, causing the firm to reduce employment. Similarly, an increase in labor productivity (the marginal product of labor) will shift the MRPL curve to the right, leading the firm to hire more labor, while a decrease in productivity will shift the curve to the left, causing the firm to reduce employment.
• Evaluate the implications of a firm's ability to set wages below the competitive level in an imperfectly competitive labor market and how this affects the firm's employment decisions based on the MRPL.
  • In an imperfectly competitive labor market, firms have some degree of market power, allowing them to set wages below the competitive level. This means the firm's wage rate will be less than the value of the marginal product of labor (the MRPL) at the profit-maximizing level of employment. The firm will continue to hire labor up to the point where the MRPL equals the wage rate, rather than the point where the MRPL equals the competitive wage. This allows the firm to capture a portion of the workers' surplus as profit, but results in a lower level of employment compared to a perfectly competitive labor market.

Related terms

Marginal Revenue:

The additional revenue a firm earns from selling one more unit of output.

Marginal Product of Labor:

The additional output produced by hiring one more unit of labor, holding all other inputs constant.

Imperfectly Competitive Labor Market: A labor market where firms have some degree of market power, allowing them to set wages below the competitive level.