The MRP schedule, shown as columns 1 and 6, is the firm's demand schedule for labour. To explain why, we must first discuss the rule that guides a profit-seeking firm in hiring any resource: To maximize profit, a firm should hire additional units of a specific resource as long as each successive unit adds more to the firm's total revenue than it adds to total cost.
Economists use special terms to designate what each additional unit of labour or other variable resource adds to total cost and what it adds to total revenue. We have seen that MRP measures how much each successive unit of a resource adds to total
Part Three • Microeconomics of Resource Markets marginaL resource cost (MRC)
The amount that each additional unit of resource adds to the firm's total (resource) cost.
mrp = mrc rule To maximize economic profit (or minimize losses) a firm should use the quantity of a resource at which its marginal revenue product is equal to its marginal resource cost.
<cepa.newschool.edu/ het/essays/margrev/ distrib.htm#marginal> Marginal productivity theory of distribution revenue. The amount that each additional unit of a resource adds to the firm's total (resource) cost is called its marginal resource cost (MRC). In equation form,
Marginal resource cost =
changeintotal(resource)cost one unit change in resource quantity
So we can restate our rule for hiring resources as follows: It will be profitable for a firm to hire additional units of a resource up to the point at which that resource's MRP is equal to its MRC. If the number of workers a firm is currently hiring is such that the MRP of the last worker exceeds his or her MRC, the firm can profit by hiring more workers. But if the number being hired is such that the MRC of the last worker exceeds his or her MRP, the firm is hiring workers who are not paying their way, and it can increase its profit by discharging some workers. You may have recognized that this MRP = MRC rule is similar to the MR = MC profit-maximizing rule employed throughout our discussion of price and output determination. The rationale of the two rules is the same, but the point of reference is now inputs of a resource, not out uts of a product.
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