Marginal revenue productivity theory of wages
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Marginal revenue productivity theory of wages, also referred to as the marginal revenue product of labor, is the change in total revenue earned by a firm that results from employing one more unit of labor. It is a neoclassical model that determines, under some conditions, the optimal number of workers to employ at an exogenously determined market wage rate.
The marginal revenue product (MRP) of a worker is equal to the product of the marginal product of labor (MP) and the marginal revenue (MR), given by MR.MP = MRP. The theory states that workers will be hired up to the point where the Marginal Revenue Product is equal to the wage rate because it is not efficient for a firm to pay its workers more than it will earn in profits from their labor.
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