Why marginal revenue product falls

Marginal revenue product is the extra revenue one more worker brings in: MRP = MP × MR. Look at what can change in that product.

The labor market is perfectly competitive, so the firm hires at the going wage. The question is about why the MRP curve slopes down, so the place to look is the firm's output. The firm uses a fixed amount of capital in the short run. As more workers share it, each extra worker eventually adds less output than the last. Marginal product falls, and with it marginal revenue product.

So the downward slope comes from diminishing marginal product of labor.

Each choice

• A (correct). Diminishing returns lower each added worker's marginal product, and MRP is marginal product times marginal revenue.
• B. In a perfectly competitive labor market the firm can hire as many workers as it wants at the market wage, so marginal factor cost stays flat at that wage. It does not fall, and it is not part of MRP anyway.
• C. Marginal cost rises, not falls, as diminishing returns set in. A student who knows that diminishing returns change something at the margin may grab the wrong curve.
• D. Total output keeps rising as long as marginal product is positive. Diminishing returns mean output grows more slowly, not that it shrinks.
• E. In a competitive labor market the wage is set by the market and stays put as one firm hires more. The firm's hiring choice does not drive the wage down.