Question

a) Why do we assume diminishing marginal product of labor (MPL)? Does the following data on a firm's production support this assumption? Assume the wage is AED 100 and the price of output is AED 10. How many workers will the firm hire? Show graphically. b) What is the marginal cost (MC) of output? Are MPL and MC related? How many units of output will the firm produce? Calculate or show graphically, Labor Total Product 25 00

Answer 1

a) In the short run, some factors of production are fixed and some are variable. For example, let us take two factors required for production,i.e., Labor(L) and Capital (K). K is a fixed factor and L is a variable factor. Intially, the quantity of K is much more than the quantity of L. When more and more of L is added up work with K, the fixed factor is efficiently and effectively utilized. So, MPL increases initially. After some time when quantity of L is much more than the quantity of K. When more and more of L is added up work with K, the MPL diminishes.

The following data supports this assumption.

TP (Q) MPL = AQ/AL 13 13 25 12 200 36 11 46 100 VMPL = P*MPL TC = Wage rate * L MC = ATC/AQ 130 100 7.69 120 8.33 110 300 9.09 400 10.00 90 500 11.11 80 600 12.50 14.29 60 800 16.67 50 900 20.00 55 70 700 76 81

Wages & Price Labor Demand curve Labor Supply curve 0 1 2 3 7 8 9 10 4 5 6 Number of workers

A firm hires the number of workers where VMPL = Wage rate. From the above table and graph it is seen that the firm will hire 4 workers.

b) Marginal cost is defined as the change in total cost due an additional unit of output production. Yes, MPL and MC are related. The is an inverse relationship between MPL and MC. When MPL falls, MC rises and vice-versa.

When 4 workers are hired, it is seen from the above table, the firm will produce a total output of 46 units.