Why does the marginal revenue product(MRP) curve slope downward for a perfectly competitive firm?
a. because MRP=MR x MPP. After some point, as more of a factor is employes, the lower its MFC is; thus MRP declines
b. Because MRP = MFC x MPP. After some point, as more of a factoc is employed, the lower its MFC is; thus MRP declines.
c. Because MRP = MR x MPP. After some point, MR declines for a product price taker; thus, MRP declines.
d. Because MRP = MFC x MR. After some point, MFC and MR decline; thus, MRP declines.
The correct answer is c. Because MRP = MR x MPP. After some point, MR declines for a product price taker; thus, MRP declines.
To understand why the marginal revenue product (MRP) curve slopes downward for a perfectly competitive firm, we need to break down the components of the MRP formula.
MRP stands for marginal revenue product, which is the additional revenue a firm earns by employing one additional unit of a factor of production (such as labor). The MRP formula is MRP = MR x MPP, where MR is the marginal revenue and MPP is the marginal physical product.
In a perfectly competitive market, firms are price takers, meaning they have no influence over the price of the product they sell. Therefore, MR is constant and equal to the price at which the firm sells its product.
As a firm hires more units of a factor of production, the marginal physical product (MPP) of that factor will eventually decline. This is because of the principle of diminishing marginal returns - as more units of a factor of production are added, the additional output produced per additional unit of that factor diminishes.
As the MPP declines, it affects the overall MRP. Since MRP is the product of MR and MPP, if MPP declines, MRP will decline as well. This is why the MRP curve for a perfectly competitive firm slopes downward. As a firm hires more units of a factor of production, the diminishing returns set in, causing the MPP to decline, and subsequently leading to a decline in MRP.