MPL, MRPL and Profit Maximization
The general rule is that firm maximizes profit by producing that quantity of output where marginal revenue equals marginal costs. The profit maximization issue can also be approached from the input side. That is, what is the profit maximizing usage of the variable input? To maximize profits the firm should increase usage "up to the point where the input’s marginal revenue product equals its marginal costs". So mathematically the profit maximizing rule is MRPL = MCL The marginal profit per unit of labor equals the marginal revenue product of labor minus the marginal cost of labor or MπL = MRPL − MCLA firm maximizes profits where MπL = 0.
The marginal revenue product is the change in total revenue per unit change in the variable input assume labor. That is MRPL = ∆TR/∆L. MRPL is the product of marginal revenue and the marginal product of labor or MRPL = MR × MPL.
- Derivation:
- MR = ∆TR/∆Q
- MPL = ∆Q/∆L
- MRPL = MR × MPL = (∆TR/∆Q) × (∆Q/∆L) = ∆TR/∆L
Read more about this topic: Marginal Product Of Labor
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