Explain how marginal revenue product is derived. Why is the MRP curve also the firms' short-run...

Explain how marginal revenue product is derived. Why is the MRP curve also the firms' short-run
the demand curve for labor? Explain why and how the demand curve for labor differs between firms
operating in a competitive industry and an imperfectly competitive industry (i.e., monopoly).

Expert Solution

1. Marginal Revenue Product is the additional/marginal revenue that the firm has generated by employing one additional employee. It is derived by Multiplied by Marginal Product Of Labour by the price of the output. (The Marginal Product of Labour is the amount of output one additional worker can generate.)

Derivation of MRP = MPL × Price of Output

2. In a competitive, profit-maximizing firm hires workers up to the point where the MRP of labour equals wage. The MRP curve slopes downward because of the diminishing Marginal Product. Therefore, the downward sloping MRP is the labour demand curve in the short run.

3. The only difference between the demand curve for labour in the perfect and imperfect market is the consideration that under monopoly, the product price will fall as the firm will sell an additional unit of its product.

Rahul Sunny answered 8 months ago

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