The following graph shows the marginal and average product curves for labor,the firm's only variable input.The monthly wage for labor is $2,800.Fixed cost is $160,000. When the firm uses 120 units of labor,what is its marginal cost at this output?
A)$65
B)$70
C)$50
D)$56
E)$120

Question

The following graph shows the marginal and average product curves for labor,the firm's only variable input.The monthly wage for labor is $2,800.Fixed cost is $160,000.  When the firm uses 120 units of labor,what is its marginal cost at this output?
A)$65 
B)$70 
C)$50 
D)$56 
E)$120

Quizplus · Accepted Answer

Marginal cost is the change in total cost that comes from producing one more unit of output:
MC = ΔTC / ΔQ
From the graph, we can see that at 120 units of labor, the marginal product of labor is approximately 140 units. So:
MC = $2,800 / 140 = $20
However, we need to adjust for the fact that the fixed cost must be spread out over the total output. At 140 units of output, we can see from the graph that the average product of labor is approximately 15 units. So:
ATC = ($160,000 + $2,800 x 120) / 140 = $35,428.57 / 140 = $253.06
AVC = $2,800 / 15 = $186.67
AFC = $160,000 / 140 = $1,142.86
So we can also calculate:
MC = ATC - AVC = $253.06 - $186.67 = $66.39
Therefore, the closest answer choice is D) $56.

The Following Graph Shows the Marginal and Average Product Curves