Marginal Revenue Product Curve

This diagram graphically illustrates the relation between marginal revenue product and the variable input. This particular curve is derived from the hourly production of Super Deluxe TexMex Gargantuan Tacos (with sour cream and jalapeno peppers) as Waldo's TexMex Taco World restaurant employs additional workers. The number of workers, measured on the horizontal axis, ranges from 0 to 10 and the revenue generated from the marginal production of Gargantuan Taco attributable to each extra worker, measured on the vertical axis. This variable ranges from -$20 to $60.

The shape of this marginal revenue product curve is most important. For the first two workers of variable input, marginal revenue product increases, as each added worker contributes more to total revenue than previous workers. This is reflected in a positive slope of the marginal revenue product curve. From the third worker on, the marginal revenue product declines, as each added worker contributes less to total revenue than previous workers. This is seen as a negative slope.

The hump-shape of the marginal revenue product curve embodies the essence of the analysis of short-run production. The upward-sloping portion of the marginal revenue product curve, up to the second worker, is due to increasing marginal returns. Decreasing marginal returns sets in after the marginal revenue product curve peaks with the second worker and declines for the third worker. In particular, this declining segment of the marginal revenue product curve reflects the law of diminishing marginal returns.