A Level Economics AQA Practice Exam

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What is meant by Marginal Revenue Product?

The total profit from all workers combined
The additional revenue generated from one more unit of a factor of production
The cost saved by reducing labor
The total output produced by a firm

The correct answer is: The additional revenue generated from one more unit of a factor of production

Marginal Revenue Product refers to the additional revenue that a firm earns by employing one more unit of a factor of production, typically labor. This concept is crucial in understanding how firms make decisions regarding hiring and resource allocation. When a firm considers hiring an additional worker, it evaluates how much extra output (and therefore revenue) that worker can produce. If the additional output generated by this new worker leads to an increase in total revenue for the firm, that additional amount is the Marginal Revenue Product. This helps firms determine the optimal number of workers to employ, as they will continue to hire until the cost of hiring (wages) equals the additional revenue generated. Understanding this concept aids in the analysis of labor demand and highlights the relationship between productivity, wage levels, and overall revenue for firms.