Question

5. The relationship between marginal product and marginal cost Musashil's Big Burger is a small restaurant that sells hamburgers. For Musashi, grills are a fixed input and workers are variable inputs. Assume that labor is Musashi's only variable cost. Musashi has a fixed cost of $50 per day and pays each of his workers $50 per day. Musashi's total output schedule and total cost at each level of labor are presented in the following table. Fill in the blanks to complete the Marginal Product 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 product from hiring one more worker.) Labor Input (Number of Workers) Total Output Marginal Product (Burgers per day) Total Cost Marginal Cost (Dollars per burger) (Burgers per day) (Dollars per day) 0 2 3 4 5 0 25 75 100 110 115 $50 $100 $150 $200 $250 $300 When hiring its third worker, Musashi's Big Burger faces marginal returns to labor. Over the range of workers for which the marginal product is decreasing, Musashi's Big Burger faces marginal cost.

blank 1-diminishing or increasing

2-decreasing or increasing

Answer 1

Labor	Total	Marginal	Total	Marginal
Input	Output	Product	Cost	Cost
0	0		50
		25		2	(100-50)/25
1	25		100
		50		1	(150-100)/50
2	75		150
		25		2	(200-150)/25
3	100		200
		10		5	(250-200)/10
4	110		250
		5		10	(300-250)/5
5	115		300
Note:
Marginal Product: Incremental production with the incremental unit of labour
i.e. MP of 2nd labour = TP at 2nd labor - TP at 1st labor = 75-25 = 50
Marginal Cost is incremental cost divide by incremental product
When Hiring its third worker, Musahi's Big Burger faces DIMINISHING marginal returns to labor
Over the range f workers for which the marginal product is decreasing, Musahi's Bug burger faces INCREASING marginal cost