Marginal revenue product the additional revenue

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Marginal Revenue Product : The additional revenue generated by employing an additional factor unit → MRP = ∆TP/∆ in factor or MRP = MR x MPP
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- 2 - Marginal Resource/Factor cost : The additional cost incurred by employing an additional factor unit → MFC = ∆TC/∆ in factor. The MFC curve horizontal for a factor price taker. The MRP = MRC Rule : (Maximizing Profits): The firm will continue to purchase additional units of a given factor as long as MRP>MFC. It stops where MRP=MFC. Product Market : MR=MC} The economic principle of equating additional benefits Factor Market : MRP=MFC} with additional costs holds in both markets. The MRP curve is the firm's factor demand curve: The factor demand curve tells us how many factor units the firm will buy at different prices. Question: Why is the MRP curve downward sloping? The MRP curve is downward sloping because (after some point) the more of a factor that is used, the lower its MRP will be (because of the law of diminishing marginal returns). In short, since MRP=MR x MPP, and MPP declines at some point, so must MRP Q P MFC MRP Q 1 Q L P L MFC 2 MRP Q 1 Q 2 MFC 1 P 1 P 2
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- 3 - Value Marginal Product (VMP): The price of a good multiply by the MPP of the factor: VMP = P x MPP a) For a product price taker: P=MR → MRP=VMP b) For a product price searcher: P>MR → VMP>MRP Summary: The following conditions hold for a firm that is a price taker in both the product and fact or markets. 1) The firm buys and employs the quantity of factor at which MRP=MFC 2) MFC = factor price. This is because the firm is a factor price taker 3) The MRP curve is the firm's factor demand curve. 4) VMP=MRP. This is because the firm is a product price taker. It follows that this firm's VMP curve will be identical to its MRP curve 5) At he profit-maximizing factor quantity, VMP=MRP=MFC=factor price The firm as product price searcher and factor price taker For the product price searcher, P>MR; therefore, VMP (P x MPP) does not equal MRP (MR x MPP), Instead VMP>MRP. Therefore, the following condition hold: 1) The firm buys and employs the quantity of factor at which MRP=MFC 2) MFC = factor price. This is because the firm is a factor price taker. 3) The MRP curve is the firm's factor demand curve 4) VMP>MRP 5) At the profit-maximizing factor quantity, VMP>MRP=MFC=factor price The Least-Cost Rule: MPP L /P L =MPP K /P K The Least-cost Rule: Specifies the combination of factors that minimizes costs. This
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