### Date : 2024-08-18 09:41 ### Topic : Marginal revenue product (MRP) of labor #macroeconomics #laboreconomics ---- # Marginal revenue product (MRP) of labor To understand the statement "Employers demand labor to maximize their profits, hiring workers up to the point where the marginal revenue product (MRP) of labor equals the wage rate," let's break it down into simpler terms: ### Key Concepts: 1. **Marginal Revenue Product (MRP) of Labor:** - The MRP of labor is the additional money (revenue) that a business earns from hiring one more worker. It depends on how much extra output (goods or services) that worker produces and the price at which the business can sell that extra output. - For example, if hiring one more worker allows a factory to produce 10 more units of a product, and each unit sells for $10, then the MRP of that worker is $100 (10 units x $10 per unit). 2. **Wage Rate:** - The wage rate is the amount of money that the employer pays to the worker for their labor. It's the cost of hiring an additional worker. ### Putting It Together: - **Profit Maximization:** - Employers want to maximize their profits, which means they want to make the most money possible after paying all their costs, including wages. - To do this, they compare the MRP of hiring one more worker to the wage rate they would have to pay that worker. - **Hiring Decision:** - If the MRP of the worker (the additional revenue the worker generates) is greater than or equal to the wage rate (the cost of hiring the worker), the employer will hire the worker. This is because the worker adds more to the employer’s revenue than they cost, increasing the employer's profit. - However, if the MRP of the worker is less than the wage rate, the employer would not hire the worker because doing so would reduce their profits (the worker would cost more than the value they add). ### Example to Illustrate: Imagine you run a bakery, and you pay workers $15 per hour. You calculate that each additional worker you hire allows you to bake and sell enough extra bread to earn an additional $20 per hour. In this case, the MRP of the worker is $20, and since this is more than the $15 you pay them, it's profitable to hire more workers. But if you consider hiring another worker, and they only allow you to earn an extra $10 per hour, then it’s not worth it because you’d be paying them $15 but only earning $10 from their work. Hiring them would reduce your profit. ### Conclusion: Employers hire workers up to the point where the revenue generated by the last worker hired (MRP) is just equal to the wage they must pay. This ensures that every worker hired contributes positively to the employer’s profits, but no worker is hired who would cause a loss. ### Reference: - ### Connected Documents: - [[14.1 Labor Supply and Demand]]