Multiple Choice QuestionThe marginal revenue product (MRP) of the imperfectly competitive seller falls for two reasons, because Blank______.Multiple choice question.MP diminishes and product price rises as output increasesMP rises and product price falls as output increasesMP diminishes and product price falls as output increasesMP diminishes and product price falls as output decreases
Question
Multiple Choice QuestionThe marginal revenue product (MRP) of the imperfectly competitive seller falls for two reasons, because Blank______.Multiple choice question.MP diminishes and product price rises as output increasesMP rises and product price falls as output increasesMP diminishes and product price falls as output increasesMP diminishes and product price falls as output decreases
Solution
The correct answer is "MP diminishes and product price falls as output increases".
Here's why:
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Marginal Product (MP) Diminishes: This is based on the law of diminishing returns, which states that as more of a variable input (like labor) is added to a fixed input (like capital), the additional output produced by the additional input eventually decreases. In other words, each additional unit of input contributes less and less to the total output. This is why the Marginal Product (MP) diminishes.
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Product Price Falls as Output Increases: In an imperfectly competitive market, sellers have some control over the price of their product. However, as they increase output, they often have to lower the price to sell all of the additional units. This is why the product price falls as output increases.
So, when both of these factors are combined, the Marginal Revenue Product (MRP) - which is the additional revenue a firm gets from employing an additional unit of input - falls.
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