Final answer:
The marginal revenue product is the amount an additional unit of the variable input adds to total revenue, which equals the marginal product of labor multiplied by the marginal revenue.
Step-by-step explanation:
The marginal revenue product is defined as the amount that an additional unit of the variable input adds to total revenue. This concept is important in fields such as economics and business, particularly when analyzing the production decisions of firms in various market structures. In the context of labor, for instance, the marginal revenue product equals the additional output produced by one more unit of labor (i.e., the marginal product of labor) multiplied by the additional revenue that output generates (marginal revenue).
For firms with market power like a monopoly, where the demand curve for their output is downward-sloping, they must lower their price to sell more output, which means their marginal revenue is less than the price. Therefore, when additional labor is employed, while the marginal product of labor might increase, the marginal revenue product may not increase proportionally due to the reduction in marginal revenue with additional output sold.
Using an example, if at an output level of 4, the marginal revenue is $600 and the marginal cost is $250, then producing this unit adds to overall profits significantly. However, at an output level of 5 where marginal revenue equals to marginal cost at $400, overall profits are unchanged. Increasing output to 6 would not be beneficial as the marginal cost of $850 exceeds the marginal revenue of $200, which would decrease profits.