Final answer:
Marginal revenue product measures the added revenue generated from the output produced by one more unit of an input, often labor, reflecting the 'extra' output turned into revenue. It helps firms ascertain the impact of changing labor quantities on marginal revenue and profits.
Step-by-step explanation:
Marginal revenue product (MRP) measures the additional revenue generated from the sale of an output produced by the addition of one more unit of an input. In this case, it often refers to labor, wherein the MRP is the extra revenue a firm earns by selling the products produced by one additional unit of labor, such as a worker. The concept of 'extra' is inherent in the definition of marginal product, which is the additional output or change in total product that results from a one-unit increase in the quantity of a variable input used in the production process.
Understanding MRP is crucial for a firm because it helps the firm determine how changes in the quantity of labor employed affect its marginal revenue and profitability. When a firm has market power in selling its output, both marginal product (MP) and marginal revenue (MR) can decline as additional units of labor are employed, indicating that the value of the output sold per additional unit of labor might decrease as more labor is used.