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Marginal Revenue Product & Marginal Cost

You have been hired to manage a small manufacturing facility which has cost and production data given in the table below.

Total Total
Workers Labor Cost Output Revenue
1 $500 100 $700
2 1000 280 1150
3 1500 440 1440
4 2000 540 1570
5 2500 600 1670
6 3000 630 1710
7 3500 640 1730

a) What is the marginal product of the second worker?

b) What is the marginal revenue product of the fourth worker?

c) What is the marginal cost of the first worker?

d) Based on your knowledge of marginal analysis, how many workers should you hire?

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Solution Preview

Let me first start by defining what is marginal revenue, marginal product and marginal cost; and state how each of them is calculated.

Marginal revenue may be defined as the extra revenue associated with the production and sale of one additional unit of output. Therefore, it is calculated by dividing the change in total revenue by the change in quantity (or output).

Marginal product is the extra output or change in total product caused by the addition of one more unit of variable input. It is calculated by ...

Solution Summary

This solution provides you with information as to what is marginal revenue, marginal product and marginal cost; and also how to calculate each of them. You are also provided with a brief explanation as to how to use marginal analysis to determine the most suitable number of workers. An excel spreadsheet is also attached to the solution which tables all the different variables and how to calculate each.