Teaching Marginal Revenue Product of Labor and Capital Using Elite Athlete Salaries and Pollution Control Examples

Abstract

The motivation for this paper is student interest in real-world examples of marginal revenue product (MRP)-particularly examples that relate directly to their career interests. This paper presents examples of the MRP of labor and capital that Principles of Microeconomics students find compelling. The labor example related to elite athlete salaries illustrates how the performance or idea generation component of one's career-e.g., writing software code or devising money laundering detection strategies-features non-rival consumption that enables potentially unbounded marginal revenue product. The physical capital example of polluting firms investing in filters to avoid environmental fines illustrates how decision-makers in all fields must first measure what physical capital creates and then translate that measure into dollars. We provide an instructional guide for adopting these examples-and for generating additional context-rich examples-within a flipped classroom framework.