Question

Behind the Supply Curve: Inputs and Costs - End of Chapter Problem 5. An increase in labor productivity means that each worker can produce more output. Recent data on productivity show that labor productivity in the U.S. nonfarm business sector grew by 1.7% between 1970 and 1999, by 2.6% between 2000 and 2009, and by 1.1% between 2010 and 2015. MC ATC c. When productivity growth is positive, what happens to the marginal cost curve and the average total cost curve? Illustrate your answer in the accompanying diagram. d. Recall that in part a, an increase in labor costs increases both average total cost and marginal cost. Cost of unit If labor costs are rising over time on average, why would a company want to adopt equipment and methods that increase labor productivity? Quantity of output Increases in labor productivity will raise the cost of production, amplifying the effects of the labor cost increase. Increases in labor productivity will lower the cost of production, counteracting the effects of the labor cost increase. Increases in labor productivity will raise the cost of production, counteracting the effects of the labor cost increase. Increases in labor productivity will lower the cost of production, amplifying the effects of the labor cost increase.

Answer 1

5. c) When productivity growth is positive, the marginal cost curve and the average total cost curve will both shift downward, with labor costs unchanged.

Cont of writ AGATE •ATC > The marginal cost core moves The shift in average total cost Quartibu downward from MC to me. aone is from ATC to ATC.

5. d) Answer - Increases in labor productivity will lower the cost of production, counteracting the effects of labor cost increase.
This is because rising labor costs will shift the ATC and MC curve upward, while productivity growth will shift the both downward. Hence, the effect is counteracted.