The law of diminishing marginal returns implies that firms have a
negatively sloped demand curve for factors of production. In part (i),
the MP curve for a factor is downward sloping because of the law of
diminishing marginal returns. If the firm uses 60 units of the factor per
month, the factor’s MP will be 400 units of output per month. In part (ii),
it is assumed that each unit of the firm’s output can be sold at $5. If the
firm uses 60 units of the factor per month, the factor’s MRP is $2000 (400
units per per unit). Since the MRP curve shows, for each
separate factor price, how many units of the factor will be hired by a
profit-maximizing firm, the MRP curve is the firm’s demand curve for the
factor.
Part (ii) of Figure 13-1 converts the marginal product curve to a
marginal revenue product (MRP) curve. Recall that
Also recall that for a competitive firm, marginal revenue is equal to the
price of the product, p. In the figure the market price (and thus the firm’s
MR) is $5 per unit. The MRP curve, therefore, has the same shape as the
MP curve. Notice that on the vertical axis, the MRP is simply the MP
part (i) multiplied by $5.
month×$ 5
MRP=MP×M