In this example, we explore the relationship between labor, capital, and revenue in a local pizza shop setting. The shop leases two pizza ovens, representing fixed capital costs of $100 per day. The variable cost arises from hiring employees at a wage of $80 per day, which fluctuates based on the number of pizzas produced. Each pizza sells for $5, establishing a clear price point for revenue calculations.

The marginal product of labor (MPL) is crucial in understanding how additional workers impact pizza production. Initially, with zero workers, no pizzas are produced. However, hiring the first worker increases production to 30 pizzas, yielding a marginal product of 30. The second worker raises production to 80 pizzas, resulting in an additional 50 pizzas. This pattern continues, demonstrating diminishing returns as more workers are added. For instance, the third worker contributes 70 pizzas, while the fourth and fifth workers contribute only 30 and 10 pizzas, respectively.

Next, we calculate the marginal revenue product (MRP), which is determined by multiplying the marginal product of labor by the price per pizza. For the first worker, the MRP is calculated as follows: 30 pizzas × $5 = $150. The second worker's contribution of 50 pizzas results in an MRP of $250, while the third worker's 70 pizzas yield $350. The fourth worker again contributes 30 pizzas, leading to an MRP of $150, and the fifth worker's 10 pizzas result in an MRP of $50.

The wage of $80 per day per employee serves as the marginal cost of hiring additional labor. Each time a new worker is hired, the marginal cost remains constant at $80, regardless of the total number of workers. This consistency allows for straightforward comparisons between MRP and marginal cost. The marginal profit is calculated by subtracting the wage from the MRP. For example, the first worker generates a marginal profit of $70 ($150 MRP - $80 wage), while the second worker generates $170. However, the fifth worker results in a negative marginal profit of -$30, indicating a loss.

From this analysis, it becomes evident that a profit-maximizing firm should hire workers until the marginal revenue product equals the wage. In this scenario, hiring four workers is optimal, as their MRPs exceed the wage, while the fifth worker's MRP falls below the wage, leading to a loss. This principle aligns with the broader economic concept that firms should continue hiring until the marginal revenue equals marginal cost, ensuring maximum profitability.

Finally, the MRP curve represents the demand curve for labor within the firm. Changes in wage levels would shift this curve, affecting the number of workers the firm is willing to hire. For instance, if the wage were lower, the firm might hire the fifth worker, while a higher wage would discourage hiring the fourth worker. Understanding these dynamics is essential for making informed labor decisions in a competitive market.