microbook_3e-page21

# microbook_3e-page21 - output that it produces – i.e its...

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Example #1 – Total Revenue and Marginal Revenue Total Revenue, denoted TR , is a function of the quantity of output that a firm produces, denoted Q, and the price at which the firm sells its output, denoted p . Specifically, Total Revenue is equal to the amount of output that a firm sells times the price. For example, if the firm sells 20 widgets at a price of \$5 each, then its Total Revenue is \$100. If a firm is in a perfectly competitive market, then the firm cannot sell its output at a price higher than the one that prevails in the market (otherwise everyone would buy the products of competitor firms). So we can assume that the price is constant . So what is a firm’s Marginal Revenue? It’s Marginal Revenue, denoted MR , is the derivative of Total Revenue with respect to a change in the quantity of output that the firm produces. +, +, p Q d Q TR d MR Q p Q TR o ¡ Example #2 – Total Product and Marginal Product of Labor If a firm produces output using “capital” – a fancy word for machinery – and labor, then the quantity of
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Unformatted text preview: output that it produces – i.e. its Total Product, denoted by TP – is a function of two variables: capital, denoted by K , and labor, denoted by L . + , 5 . 5 . L K L , K TP ¡ So what is the Marginal Product of Labor, denoted MPL ? Marginal Product of Labor is the change in Total Product caused by an increase in Labor input. Marginal Product of Labor is the derivative of Total Product with respect to Labor. Notice that we’re looking solely at the change in Total Product that occurs when we vary the Labor input. We’re not changing the capital stock, so when we take the derivative of Total Product with respect to Labor, we’ll hold the firm’s capital stock is fixed – i.e. we’ll hold it constant . + , + , 5 . 5 . 5 . 5 . L K 5 . L d L K, TP d MPL L K L , K TP ¡ ¡ o ¡ Page 21...
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