Definition of Marginal Rate of Return

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Manufacturing more product may eventually lead to diminished returns.
Manufacturing more product may eventually lead to diminished returns. (Image: RGtimeline/iStock/Getty Images)

The marginal rate of return measures the effectiveness of investing extra time and effort. For example, suppose a company spends $150,000 on marketing, then increases the budget by $1,000. The marginal rate return is the amount of increased sales that added $1,000 generates. If it brings in $3,000 in added sales, that's a 300 percent marginal rate of return.

A Handy Tool

The marginal rate of return has many uses. The Social Security Administration, for instance, has looked at how much extra benefits a retiree earns if he's already worked 35 years on the job. The rate of return -- measured by added benefits -- on the marginal added years is low. Workers with low lifetime earnings see a higher marginal rate. A student can use the marginal rate of return to calculate how much extra study time improves her grade.

Diminishing Returns

Higher investment doesn't always get better results. The law of diminishing returns says that as you invest more money, effort or time, the marginal rate of return eventually drops. Too much extra study time may make a student too sleepy to do well. Added marketing may not help if the market is already saturated. At some point, the returns are too low to justify more investment.

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