While explaining a firm’s demand for labour, the additional earning that the firm gets by selling each extra unit of output is called its:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Marginal revenue
The extra money a firm earns by selling one more unit of output is its marginal revenue (MR).
Option (1) Marginal product — Incorrect. Marginal product is the extra output from one more unit of labour. It is counted in units of the good, not in money.
Option (2) Average revenue — Incorrect. Average revenue is total revenue per unit of output, an average over all units.
Option (3) Value of marginal product — Incorrect. VMP is price times marginal product. It is the extra earning from one more unit of labour, not from one more unit of output.
Option (4) Marginal revenue — Correct. MR is the additional earning from each extra unit sold.
NCERT (2026-27): “Wage Determination in Labour Market … The firm being a profit maximiser will always employ labour upto the point where the extra cost she incurs for employing the last unit of labour is equal to the additional benefit she earns from that unit. The extra cost of hiring one more unit of labour is the wage rate (w). The extra output produced by one more unit of labour is its marginal product (MPL) and by selling each extra unit of output, the additional earning of the firm is the marginal revenue (MR) she gets from that unit. Therefore, for each extra unit of labour, she gets an additional benefit equal to marginal revenue times marginal product which is called Marginal Revenue Product of Labour (MRPL). Thus, while hiring labour, the firm employs labour up to the point where w = MRPL and MRPL = MR × MPL” Glossary: “Average revenue – Total revenue per unit of output.” Glossary: “Value of marginal product (VMP) of a factor – Price times Marginal Product of the factor.” |