until the last unit of that factor adds as much to revenue as it does to
costs.
Profit-maximizing firms will hire units of a variable factor up to the point at which the
marginal revenue generated by the factor equals the marginal cost of employing the factor.This result is true of all profit-maximizing firms, whether they are selling
under conditions of perfect competition, monopolistic competition,
oligopoly, or monopoly.
Now we introduce a new term to help us state this profit-maximizing
condition more clearly. The marginal revenue product (MRP) is the
extra revenue generated by hiring one more unit of a variable factor. How
is it computed? Recall that marginal revenue (MR) is the change in
revenue resulting from the sale of one additional unit of output. Also
recall that the marginal product (MP) of a variable factor is the additional
output that results from the use of one additional unit of that factor. By
multiplying marginal revenue and marginal product we determine the
marginal revenue product of the factor. [ 26 ] For example, if the factor’s
marginal product is 2 units and the firm’s marginal revenue is $7.50, the
factor’s marginal revenue product is
We can now restate the condition for a firm to be maximizing its profits.
The firm should hire units of a variable factor until:
$ 15 ( 2 ×$7.50).