MRP trend over time for a producer good

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    In the Crusoe Bakery example in 12.pptx slide 5, the MRP for the oven increases each year. This seems counter-intuitive to me. All other factors being equal, wouldn’t the marginal revenue be expected to go down each year since the oven would be expected to in general have more repairs/down time the older it is? I realize this was just an example to help teach us how to compute the sum of the DMRP, so maybe the numbers were just arbitrary. If there is some logic for why the MRP would in reality tend to go up over time, I’m interested in hearing it.


    The MRP depends on both the demand for the output (which determines the output’s price) and the physical productivity of the capital good. While the latter might decline over time without maintenance and repair (which is omitted from the example for simplicity), it might also increase with more productive complementary factors of production, such as a more skilled worker (which is also omitted for simplicity). Demand for the output might be expected to rise with a successful business and even more so in an economy with price inflation like ours.

    As you suggest, rising MRP is a not a necessary feature of all production, but merely one logical possibility.


    That all makes sense. Thanks!

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