Marginal revenue productivity theory of wages

The marginal revenue productivity theory of wages is a model of wage levels in which they set to match to the marginal revenue product of labor, (the value of the marginal product of labor), which is the increment to revenues caused by the increment to output produced by the last laborer employed. In a model, this is justified by an assumption that the firm is profit-maximizing and thus would employ labor only up to the point that marginal labor costs equal the marginal revenue generated for the firm. This is a model of the neoclassical economics type. The marginal revenue product () of a worker is equal to the product of the marginal product of labour () (the increment to output from an increment to labor used) and the marginal revenue () (the increment to sales revenue from an increment to output): . The theory states that workers will be hired up to the point when the marginal revenue product is equal to the wage rate. If the marginal revenue brought by the worker is less than the wage rate, then employing that laborer would cause a decrease in profit. The idea that payments to factors of production equal their marginal productivity had been laid out by John Bates Clark and Knut Wicksell in simpler models. Much of the MRP theory stems from Wicksell's model. The marginal revenue product of labour is the increase in revenue per unit increase in the variable input = Here: is the Total Revenue (a money amount). is the marginal product (units created with the marginal labor time and effort). is the amount of goods (a measure of the quantity or volume sold). is marginal revenue (the money revenue received from the marginal product produced). is Labour (amount of labor time or effort). [This page is incomplete. Please define each and every variable and include their dimension] The change in output is not limited to that directly attributable to the additional worker. Assuming that the firm is operating with diminishing marginal returns then the addition of an extra worker reduces the average productivity of every other worker (and every other worker affects the marginal productivity of the additional worker).