📚 Learning Guide
Calculating Marginal Revenue Product
easy

If a firm increases the use of labor while keeping capital constant, what happens to the marginal revenue product of labor if the inputs are substitutes?

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Learning Path

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Choose the Best Answer

A

It increases

B

It decreases

C

It remains the same

D

It fluctuates unpredictably

Understanding the Answer

Let's break down why this is correct

Answer

When a firm increases the use of labor while keeping capital constant, the marginal revenue product of labor can change, especially if the inputs are substitutes. This means that as more workers are hired, each additional worker may contribute less to the firm's overall output because they have to share the same amount of capital. For example, imagine a factory with a fixed number of machines; if more workers are added, they might not all be able to use the machines efficiently, leading to diminishing returns. As a result, the value generated by each additional worker may decrease, which means the marginal revenue product of labor falls. Therefore, while increasing labor can initially boost productivity, too much labor without enough capital can lead to reduced efficiency.

Detailed Explanation

When a firm uses more workers and keeps machines the same, each worker can help more. Other options are incorrect because Some might think that adding workers makes each one less useful; It's a common mistake to think that adding workers doesn't change anything.

Key Concepts

Input Substitutability
Topic

Calculating Marginal Revenue Product

Difficulty

easy level question

Cognitive Level

understand

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