The principle of diminishing return

The principle of diminishing returns tells us that as more labour is used, eventually the marginal product of labour will fall. This was illustrated in Table 5.3. So how can the firm determine the optimal number of workers to employ? To do this the firm needs to know the marginal product of each worker and from that the revenue derived from each worker. Assuming that the product being produced in Table 5.3 sells for £20 per unit, Table 5.3 can be recalculated in terms of money rather than physical units of output (see Table 13.8). Columns (1) and (2) appear in Table 5.3. Column (3) is the marginal revenue product or the revenue added by each additional worker, and is obtained by multiplying the marginal (physical) product of labour by the price at which that output
sells, £20. Column (4) is the average revenue product per worker, obtained by multiplying Column (2) by £20.