Economics Short Run Vs Long Run Costs Questions
In the short run, the average revenue product (ARP) impacts a firm's decision-making process by helping them determine the optimal level of input usage. The ARP represents the additional revenue generated by each unit of input, such as labor or capital.
If the ARP is greater than the cost of the input, it indicates that the firm is generating more revenue from each unit of input, suggesting that they should increase their input usage to maximize profits. Conversely, if the ARP is lower than the cost of the input, it implies that the firm is not generating enough revenue to cover the cost of the input, indicating that they should decrease their input usage to minimize losses.
Therefore, the ARP guides a firm's decision on whether to increase or decrease input usage in the short run, helping them optimize their production and profitability levels.