Key Points Firms will hire more labor when the marginal revenue product of labor is greater than the wage rate, and stop hiring as soon as the two values are equal. The point at which the MRPL equals the prevailing wage rate is the labor market equilibrium.

The marginal revenue productivity theory states that a profit maximizing firm will hire workers up to the point where the marginal revenue product is equal to the wage rate. The change in output from hiring one more employee is not limited to that directly attributable to the additional worker.

The principle that to maximize profit (or minimize losses), a firm should employ the quantity of a resource at which its marginal revenue product (MRP) is equal to its marginal resource cost (MRC), the latter being the wage rate in pure competition.

Least Cost Combination occurs when a firm adjusts their employment of resources to minimize costs. The least cost combination is found where the marginal product per dollar for all the resources a firm employs are equal (MPL/PL=MPN/PN=MPC/PC).

Least Cost Rule: production at least cost requires the ratio of labor’s marginal product to its price equals the ratio of capital’s marginal product to its price. The amounts of labor and capital employed must be adjusted, all the while keeping output constant, until this condition is achieved.

The principle of least cost combination states that if two factor inputs are considered for a given output the least cost combination will be such where their inverse price ratio is equal to their marginal rate of substitution.

Since the firm’s goal is to maximise profit, the optimum input combination for producing a particular quantity of its product would be one that would produce the output at the minimum possible cost. The optimum input combination in this case is known as the least cost combination of inputs.

w/r is the wage rate to rental rate (the cost of employing capital as an input) ratio. This measures the relative cost of employing inputs. x0 and y0 are isocost curves denotion the various input combinations that yield an output of x0 or y0, respectively.

When marginal product of a factor is zero then total product will be maximum.

When the MP is declining and negative, the Total Product declines. When the MP becomes zero, Total Product reaches its maximum.

As the marginal product begins to fall but remains positive, total product continues to increase but at a decreasing rate. As long as the marginal product of a worker is greater than the average product, computed by taking the total product divided by the number of workers, the average product will rise.

Relationship to marginal cost When average cost is declining as output increases, marginal cost is less than average cost. When average cost is rising, marginal cost is greater than average cost. When average cost is neither rising nor falling (at a minimum or maximum), marginal cost equals average cost.

How to Calculate Fixed Cost

1. Fixed costs = Total production costs — (Variable cost per unit * Number of units produced)
2. $4,000 total production costs — ($3 * 1,000 tacos) = $1,000 fixed cost.
3. Average fixed cost = Total fixed cost / Total number of units produced.

If a firm earns normal profit, then it has generated revenues. a. equal to the sum of implicit and explicit costs. (

Profit for a firm is total revenue minus total cost (TC), and profit per unit is simply price minus average cost. To calculate total revenue for a monopolist, find the quantity it produces, Q*m, go up to the demand curve, and then follow it out to its price, P*m. That rectangle is total revenue.

Maximum Profit Components Profits equal total revenue subtract total expenses. For example, say that at a price of $10, you think you can sell 200 products and incur fixed expenses of $1,000 and variable expenses of $800. The total revenue at this price level is 200 multiplied by $10, or $2,000.

Determine marginal cost by taking the derivative of total cost with respect to quantity. Set marginal revenue equal to marginal cost and solve for q. Substituting 2,000 for q in the demand equation enables you to determine price. Thus, the profit-maximizing quantity is 2,000 units and the price is $40 per unit.

3) Normal Profits: Normal profits are earned when the firm is producing where AC = AR. A firm must earn at least Normal Profits if it is to stay in business in the long run. 1) Equilibrium: Occurs at point E where MC = MR and MC is rising and cuts MR from below.

Normal profit is a profit metric that takes into consideration both explicit and implicit costs. It may be viewed in conjunction with economic profit. Normal profit occurs when the difference between a company’s total revenue and combined explicit and implicit costs are equal to zero.

TR–TC = Profit As shown in the table, the TR of a competitive firm is increasing at a constant rate of 10. It starts from 0 when quantity is 0, Then with in each unit increase in the quantity TR is increasing by 10 i.e. when Q = 1, TR = 10.