When firm A hires one worker it pays $10 an hour and its total labor cost is $10. When it hires a second worker, it has to pay $11 to each of its two workers and its total labor cost is $22. When it hires a third worker, it has to pay $12 to each of its three workers and its total labor cost is $36. For firm A,
A)its marginal factor cost is greater than the wage rate it pays, except for the first worker it hires.
B)its marginal factor cost is greater than the wage rate it pays, except for the first two workers it hires.
C)its supply curve of labor lies above its marginal factor cost curve.
D)it is likely that marginal revenue product is always greater than marginal factor cost.
E)none of the above

Question

Quizplus · Accepted Answer

The marginal factor cost (MFC) for firm A increases with each additional worker because the firm must pay all workers a higher wage for each additional worker hired. For the first worker, the MFC is equal to the wage rate ($10). However, for the second worker, the MFC is the total additional cost to hire the second worker, which is $12 ($22 total labor cost for two workers minus the $10 total labor cost for one worker). This pattern continues, making the MFC greater than the wage rate for each additional worker after the first.

When Firm a Hires One Worker It Pays $10 an Hour