Marginal Revenue Product (MRP) Calculator
This calculator determines the Marginal Revenue Product (MRP) for an input, which is the additional revenue generated by employing one more unit of that input. It requires the Marginal Product (MP) of the input and the Marginal Revenue (MR) of the output.
Enter the **Marginal Product (MP)** and the **Marginal Revenue (MR)** in their respective fields. Ensure consistent units for revenue and output.
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Understanding Marginal Revenue Product (MRP) & Formula
What is Marginal Revenue Product (MRP)?
Marginal Revenue Product (MRP) measures the change in total revenue associated with employing one additional unit of a resource (like labor, capital, etc.), assuming all other inputs are held constant. It helps firms decide how many units of an input to hire or purchase.
MRP Formula
The formula for Marginal Revenue Product is straightforward:
MRP = Marginal Product (MP) × Marginal Revenue (MR)
Where:
- Marginal Product (MP): The increase in physical output resulting from adding one more unit of the input.
- Marginal Revenue (MR): The increase in total revenue resulting from selling one more unit of the product.
Relationship to Input Demand
A firm operating in competitive markets will hire or purchase additional units of an input as long as the Marginal Revenue Product (MRP) of that input is greater than or equal to the marginal cost of that input (e.g., the wage rate for labor). The MRP curve is essentially the firm's demand curve for that input (in the short run, assuming only one variable input).
MRP Calculation Examples
Click on an example to see the step-by-step calculation:
Example 1: Manufacturing Worker
Scenario: A factory hires an additional worker who increases production by 5 units per hour. Each unit sells for $10, and the price doesn't change when selling more (perfect competition, so MR = Price).
1. Known Values: Marginal Product (MP) = 5 units, Marginal Revenue (MR) = $10.
2. Formula: MRP = MP × MR
3. Calculation: MRP = 5 × $10
4. Result: MRP = $50
Conclusion: Hiring this worker adds $50 to the factory's revenue per hour.
Example 2: Adding a Machine
Scenario: Installing a new machine increases daily output by 50 units. The company can sell these extra units for $20 each (MR = $20).
1. Known Values: MP = 50 units, MR = $20.
2. Formula: MRP = MP × MR
3. Calculation: MRP = 50 × $20
4. Result: MRP = $1000
Conclusion: The additional machine generates $1000 in extra revenue per day.
Example 3: Consultant in an Imperfect Market
Scenario: A consultant increases the firm's output sold by 10 units per week. Due to market conditions, selling these extra units means the firm's *marginal* revenue per unit is $8 (less than the average price).
1. Known Values: MP = 10 units, MR = $8.
2. Formula: MRP = MP × MR
3. Calculation: MRP = 10 × $8
4. Result: MRP = $80
Conclusion: The consultant's marginal revenue product is $80 per week.
Example 4: Diminishing Returns
Scenario: As more workers are added, the next worker only increases output by 3 units (MP is falling). Marginal Revenue is constant at $12 per unit.
1. Known Values: MP = 3 units, MR = $12.
2. Formula: MRP = MP × MR
3. Calculation: MRP = 3 × $12
4. Result: MRP = $36
Conclusion: The MRP for this worker is $36.
Example 5: Zero Marginal Product
Scenario: Adding another worker leads to zero additional output (MP = 0), perhaps due to overcrowding. Marginal Revenue is $15.
1. Known Values: MP = 0 units, MR = $15.
2. Formula: MRP = MP × MR
3. Calculation: MRP = 0 × $15
4. Result: MRP = $0
Conclusion: The worker has a zero marginal revenue product.
Example 6: Negative Marginal Product
Scenario: Adding *too many* units of input causes congestion, actually *reducing* total output by 2 units (MP = -2). Marginal Revenue is $10.
1. Known Values: MP = -2 units, MR = $10.
2. Formula: MRP = MP × MR
3. Calculation: MRP = -2 × $10
4. Result: MRP = -$20
Conclusion: The marginal revenue product is negative, meaning using this input unit reduces total revenue.
Example 7: Very High Marginal Revenue
Scenario: An input increases output by 1 unit (MP = 1) of a very high-value product where MR is $500.
1. Known Values: MP = 1 unit, MR = $500.
2. Formula: MRP = MP × MR
3. Calculation: MRP = 1 × $500
4. Result: MRP = $500
Conclusion: The input unit generates $500 in additional revenue.
Example 8: Low Marginal Revenue
Scenario: An input adds 20 units of output (MP = 20), but the product sells in a very competitive market where MR is only $1.50 per unit.
1. Known Values: MP = 20 units, MR = $1.50.
2. Formula: MRP = MP × MR
3. Calculation: MRP = 20 × $1.50
4. Result: MRP = $30
Conclusion: The MRP is $30.
Example 9: Both MP and MR are 0
Scenario: Adding an input unit produces no extra output (MP = 0), and due to market saturation, selling any extra units would yield no additional revenue (MR = 0).
1. Known Values: MP = 0 units, MR = $0.
2. Formula: MRP = MP × MR
3. Calculation: MRP = 0 × $0
4. Result: MRP = $0
Conclusion: The MRP is $0.
Example 10: Using Consistent Units
Scenario: An input adds 100 units of output per day. The marginal revenue is $0.50 per unit. (Ensure MR unit matches the output unit from MP).
1. Known Values: MP = 100 units/day, MR = $0.50/unit.
2. Formula: MRP = MP × MR
3. Calculation: MRP = 100 × $0.50
4. Result: MRP = $50
Conclusion: The MRP is $50 per day.
Frequently Asked Questions about Marginal Revenue Product
1. What is Marginal Revenue Product (MRP)?
MRP is the additional revenue a firm earns by employing one more unit of an input (like labor, capital, etc.), holding all other inputs constant. It measures the contribution of an additional input unit to the firm's total revenue.
2. How is MRP calculated?
The basic formula is: MRP = Marginal Product (MP) × Marginal Revenue (MR).
3. What is Marginal Product (MP)?
MP is the additional output produced by using one more unit of an input, holding all other inputs constant.
4. What is Marginal Revenue (MR)?
MR is the additional revenue generated by selling one more unit of the product.
5. Why is MRP important for businesses?
Businesses use MRP to make decisions about how many units of an input to employ. In a competitive market, a firm will typically hire units of input as long as the MRP is greater than or equal to the cost of that input (e.g., the wage rate for labor).
6. Can MRP be negative?
Yes, MRP can be negative if either Marginal Product (MP) or Marginal Revenue (MR) is negative. MP can become negative if adding more input units leads to *less* total output. MR can be negative if the price must be lowered significantly to sell more, causing total revenue to fall.
7. How does market structure affect MR and thus MRP?
In a perfectly competitive market, MR = Price. In an imperfectly competitive market, MR < Price, making the calculation slightly different.
8. Is MRP the same as Marginal Physical Product (MPP)?
No. Marginal Physical Product (MPP or MP) is the *quantity* of additional output. MRP converts this quantity into additional *revenue* by multiplying it by Marginal Revenue.
9. How does Diminishing Marginal Returns affect MRP?
As more variable input is added, Marginal Product (MP) eventually falls. Since MRP = MP × MR, a falling MP (with constant MR) causes MRP to fall. This is why the MRP curve typically slopes downwards.
10. What inputs can MRP be calculated for?
MRP can be calculated for any variable input, such as labor, raw materials, or capital, as long as you can determine its Marginal Product and the Marginal Revenue of the output it helps produce.
