Question

Profit-maximizing firms will hire additional units of a resource up to the point at which the marginal revenue product (MRP) of the resource equals its price. With multiple inputs, firms will expand their use of each until the marginal product divided by the price (MP/P) is equal across all inputs

What is the link between marginal revenue product and wages? Due to there being discrepancies between the productivity and resource offerings (i.e., education, skills, experience) in labor markets, is it justified for one employee with a higher marginal revenue product to earn a higher wage than an employee with a lower marginal revenue product? Does this notion of marginal revenue product and wages conflict with minimum wage laws?

Review the mechanics of demand and supply. How does marginality work in economics?

Answer 1

Marginal Revenue Product  (MRP) is the change in total revenues that results from each additional unit of resources. Therefore, marginal revenue product equals the change in total revenue divided by the unit change in resource quantity.

Marginal revenue product = Revenue change / Additional input

The firm maximizes its profits by continuously adding resources as long as the MRP is greater than or equal to the Marginal Revenue Cost (MRC) (price). hence, profit is maximized when MRP=MRC.

Link between Marginal revenue product and wages :

The marginal revenue productivity theory of wages is a theory in a neoclassical economics stating that wages are paid at a level equal to the Marginal revenue product of labor, which is the increment of revenue caused by the increment to output produced by the last laborer employed. In a model, this is justified by an assumption that the firm is profit maximizing and thus would employ labor only up to the point that marginal labor costs equal the marginal revenue generated for the firm.

Income for most people is determined by the market value of the productive resources they sell. In a labor market, in the absence of other changes, if wage or salary payment increase, workers will increase the quantity of labor they supply and firms will decrease the quantity of labor they demand.

Labor wage is paid equal to their marginal revenue product. Difference in wage is resulted from differences in the marginal revenue product of labors. There is positive relationship between marginal revenue product of a labor and its wages. when the marginal revenue product of a labor is high its wage level will be high and low wage will be paid to labors with low level of marginal revenue product.