Principles of Microeconomics / Unit 13 MIC 1211 worked example, 60 to 90 seconds
Marginal Revenue Product with a Downward-Sloping Product Demand
The idea
When the product's price falls with output, compute total revenue at each number of workers as output times the price that output fetches, then marginal revenue product as the change in total revenue from each added worker. Compare it with the wage as before. Then compare the number hired with the number a price-taking firm would hire on the same product table at the initial price, to show that market power cuts employment.
In practice
Worked example: the car wash's output of thirty, fifty-six, seventy-eight, ninety-six and one hundred ten cars sells at twelve, eleven, ten, nine and eight dollars a wash, so total revenue is three sixty, six sixteen, seven eighty, eight sixty-four and eight eighty. Marginal revenue product is three sixty, two fifty-six, one sixty-four, eighty-four and sixteen. At a wage of one hundred fifty the third worker's one sixty-four is hired and the fourth's eighty-four is not: three workers. A price taker at ten dollars hired four.
Where people slip
Marginal revenue product is the change in total revenue, never marginal product times the new price; the fourth worker adds eighteen cars at nine dollars, but the price cut on the earlier seventy-eight cars takes back most of it. And the wage did not change; the firm hired less because its demand for labor is lower.
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