Why is the concept of marginal product important for business owners to understand?

• A. It measures the total revenue generated from selling all units produced.
• B. It helps determine how adding one more unit of input affects total output, guiding efficient resource allocation.
• C. It indicates the average cost of producing each unit of output.
• D. It shows the total profit a business can earn from all inputs combined.

Answer: (B)

Verified step by step guidance

1. Understand that the marginal product (MP) refers to the additional output produced by adding one more unit of a specific input, holding other inputs constant.
2. Recognize that business owners use the marginal product to assess how effectively an additional input (like labor or capital) increases total production.
3. Note that knowing the marginal product helps in deciding whether hiring more workers or investing in more equipment will increase output efficiently or if it leads to diminishing returns.
4. Realize that this concept guides resource allocation by showing the point at which adding more input no longer results in proportional increases in output, helping to avoid wasteful spending.
5. Distinguish marginal product from other concepts like total revenue, average cost, or total profit, as it specifically focuses on the incremental change in output from an additional input unit.