CHAPTER 14 • Markets for Factor Inputs 531 Wage (dollars per hour) Competitive Output Market MRPL ϭ MPL · P Monopolistic Output Market MRPL ϭ MPL · MR Hours of work F IGURE 14.1 MARGINAL REVENUE PRODUCT In a competitive factor market in which the producer is a price taker, the buyer’s demand for an input is given by the marginal revenue product curve The MRP curve falls because the marginal product of labor falls as hours of work increase When the producer of the product has monopoly power, the demand for the input is also given by the MRP curve In this case, however, the MRP curve falls because both the marginal product of labor and marginal revenue fall The lower curve in Figure 14.1 is the MRPL curve when the firm has monopoly power in the output market When firms have monopoly power, they face a downward-sloping demand curve and must therefore lower the price of all units of the product in order to sell more of it As a result, marginal revenue is always less than price (MR < P) This explains why the monopolistic curve lies below the competitive curve and why marginal revenue falls as output increases Thus the marginal revenue product curve slopes downward in this case because the marginal revenue curve and the marginal product curve slope downward Note that the marginal revenue product tells us how much the firm should be willing to pay to hire an additional unit of labor As long as the MRPL is greater than the wage rate, the firm should hire more labor If the marginal revenue product is less than the wage rate, the firm should lay off workers Only when the marginal revenue product is equal to the wage rate will the firm have hired the profit-maximizing amount of labor The profit-maximizing condition is therefore MRPL = w (14.3) Figure 14.2 illustrates this condition The demand for labor curve DL is the MRPL Note that the quantity of labor demanded increases as the wage rate falls