• If the marginal is less than the average, then the average declines.


• If the marginal is greater than the average, then the average rises.


• If the marginal is equal to the average, then the average does not change.

Making Tacos

Average and Marginal Revenue Product

• Marginal Greater Than Average : For the first few quantities of variable input (workers), marginal revenue product is rising and lies above average revenue product. This is consistent with an increasing average revenue product. If Waldo (proprietor of Waldo's TexMex Taco World) hires an additional worker in this early stage of production, then the marginal revenue product (that is the extra contribution) of this worker is greater than that of the existing workers. This, as such, increases the average for all workers.
  
  Even after the law of diminishing marginal returns kicks in, and marginal revenue product declines, average revenue product continues to increase because the marginal exceeds the average.


• Marginal Equal To Average: The point of intersection between the marginal revenue product and average revenue product curves is also the peak of the average revenue product curve. If the productivity of the marginal worker is equal to the average revenue productivity of the existing workers, then the average does not change.


• Marginal Less Than Average: Once the marginal revenue product curve moves below the average revenue product curve, then the average revenue product curve declines. As Waldo hires an additional worker in the middle of this range, the marginal revenue product of this worker is less than that of the existing workers, which pulls down the overall average.

The Law of Diminishing Marginal Returns

The "hump shape" of the average revenue product curve is thus attributable, indirectly, to the law of diminishing marginal returns and the "hump shape" of the marginal revenue product curve. Increasing marginal returns means marginal revenue product is rising and because average revenue product necessarily starts at zero (zero production means zero average revenue product), marginal revenue product lies above average revenue product and causes it to rise, as well.

With the onset of decreasing marginal returns, marginal revenue product declines. However, for this initial part of the marginal revenue product decline, average revenue product continues rising because marginal revenue product is still greater. After marginal revenue product falls enough to meet up and intersect average revenue product, average revenue product peaks. As marginal revenue product, again guided by the law of diminishing marginal returns, continues to decline and falls below average revenue product. This causes the decline of average revenue product.