Academic journal article Atlantic Economic Journal

A Pedagogical Note on the Marginal Revenue Product Curve

Academic journal article Atlantic Economic Journal

A Pedagogical Note on the Marginal Revenue Product Curve

Article excerpt

The concept of the marginal revenue product (MRP) is frequently focused upon in chapters on factor input markets of microeconomic textbooks. In a competitive output market, the additional monetary contribution of a variable input is also referred to as the value of the marginal product (VMP). The MRP (VMP) curve, being the product of the marginal physical product and marginal revenue (price) of the output, for most practical purposes, cannot be linear because the product of even two convex functions would most likely be nonlinear with respect to the variable input L. For a given linear inverse demand function, P = a - BQ(K, L) where Q is a standard concave production function with respect to L. The shape of MRP = (a - 2BQ(K, L)) x [delta]Q/[delta]L is determined by: 1) the convex inverse demand function (-Q is convex for a concave Q) and 2) the marginal physical product which is in most cases convex. As a result, the shape of the MRP curve cannot be determined without simulating some well-known production functions.

Seven well-known production functions are employed in the simulation: Cobb-Douglas, Cubic, Quadratic, Constant Elasticity of Substitution (CES), Mukerji Variable Elasticity of Substitution (MVES), Revankar Variable Elasticity of Substitution (RVES), and Translogarithm Production Functions. Many estimated coefficients are adopted from Duffy [Review of Regional Studies, Fall 1988], Cobb and Douglas [American Economic Review Papers and Proceedings, 1928], Arrow, Chenery, Minhas, and Solow [Review of Economics and Statistics, 1961], Bodkin and Kline [Review of Economics and Statistics, 1967], and Mizon [Econometrica, 1977]. …

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