First Way to Approach the Theory, Q = Q(K,N) Choose K and / to maximize profit: TT = P(Q(K, N) ) X Q(K, N)- rk- w(N)N Revenue: p*Q Costs Take derivative using product and chain rule. Set to zero. Labour example: 1 9P Q Q ( N, K) + PON ON _OWN - W = 0 2. If ow op aQ(K, N) ON = 0, aQ = 0 - W = P ON "Marginal Revenue Product" Intuition: Wages equal to the revenue generated by the last worker hired