Firms care about the marginal product of a factor because they can sell the output to generate revenue. It is the reveune however that matters. A profit maximizing firm must compare the added revenue generated by hiring more inputs with the added costs of hiring. How do we determine the added revenue generated?
The added revenue generated is simply the added output (marginal product) mulitplied by the added revenue (marginal revenue) generated by selling the additional output. This product is usually termed the Marginal Revenue Product (MRP).
Copyright © 1995-2004 OnLineTexts.com, Inc. - All Rights Reserved