Marginal revenue product combines productivity and output value

Use marginal revenue product = marginal product × marginal revenue.

First subtract adjacent total-product rows to find the added worker’s MP. Then multiply by marginal revenue from selling the added output. If the product market is perfectly competitive, MR=P, and MRP is also called value of marginal product. If the employer has product-market power, MR is below price, so using product price overstates MRP.

Build the hiring row

The fourth worker raises output from 28 to 35 units, so MP is 7. Each extra unit adds $9 to revenue, giving MRP of $63. If the wage and other marginal hiring cost total $55, the fourth worker adds $8 to profit.

MRP translates physical productivity into the revenue unit needed for hiring. The formula is

MRP_L=MP_L× MR.

The units verify it: output per worker times dollars per output unit equals dollars per worker. That final unit can be compared with a wage or another marginal resource cost.

Build MRP in stages. Suppose output is 18 with one worker, 42 with two, 63 with three, and 79 with four. The successive MPs are 18, 24, 21, and 16. If output sells competitively for $5, the corresponding MRPs are $90, $120, $105, and $80. The second worker has the largest MRP because specialization first raises MP. Later diminishing returns lower it.

If the firm has product-market power, use marginal revenue rather than price. Selling additional output may require lowering price, so MR<P and MP× P overstates the added revenue. The phrase value of marginal product is often reserved for MP× P in a competitive output market. MRP is the general hiring concept.

Product power changes the value

A worker adds 10 units. Product price at the resulting output is $12, but marginal revenue is $8. The worker’s MRP is $80, not $120. Comparing a $95 wage with price-based value would recommend hiring, while the correct MR comparison shows the worker reduces profit.

MRP can fall because MP falls, MR falls, or both. A more productive worker can have low MRP when the additional output has little value. A valuable product can still produce low MRP when another worker adds very little output. Diagnose both factors before attributing a change solely to labor quality.

Never multiply total product by price for MRP. That gives a total revenue measure associated with the workforce, not the contribution of the marginal worker. Subtract adjacent totals first, then value the added output.

Keep the demand connection visible. If a restaurant’s meals become more popular, the price or marginal revenue generated by another server’s output rises, so labor demand can shift right even when the server’s physical productivity is unchanged. If better equipment raises marginal product, MRP also rises. By contrast, a change in the wage is movement along the firm’s labor-demand schedule, not a shift of that schedule.

Finish by stating both the dollar contribution and the hiring implication at the stated marginal resource cost.