Question

Consider a pizza restaurant where ovens are a fixed input and workers are variable inputs. Assume labor is the only variable cost for the business. The pizza restaurant has a fixed cost of $100 per day and pays each worker $150 per day.

Fill in the blanks to complete the Marginal Physical Product of Labor column for each worker and the Marginal Cost column at each level of labor. (Hint: Marginal cost is the change in total cost divided by the change in the quantity of output. You can calculate it here by dividing the increase in total cost from hiring one more worker by the marginal physical product from hiring one more worker.)

Labor	Quantity of Output	Marginal Physical Product of Labor	Total Cost	Marginal Cost
(Workers)	(Pizzas per day)	(Pizzas per day)	(Dollars per day)	(Dollars per pizza)
0	0		100
1	12		250
2	27		400
3	47		550
4	77		700
5	102		850
6	117		1,000

True or False: As marginal physical product rises, marginal cost falls.

True

False

Answer 1

Marginal physical product of labor gives the change in output when 1 additional worker is added. SO, here, MPl for 2nd worker = 12 - 0 = 12. Similarly, we fill up the table.

Marginal cost gives the change in cost when there is a change is quantity produced. SO, here, MC for Q = 12 is = (250-100)/ (12 - 0) = 150/12 = 12.5. Similarly, we fill up the table.

Labor	Quantity of Output	Marginal Physical Product of Labor	Total Cost	Marginal Cost
0	0		100
1	12	12	250	12.5
2	27	15	400	10
3	47	20	550	7.5
4	77	30	700	5
5	102	25	850	6
6	117	15	1000	10

It is true that as marginal physical product rises, marginal cost falls