Question

Describe clearly and in a structured manner why in the short term the marginal product of labour and the marginal cost are inversely related. Why does the marginal cost decrease when the marginal product of labour rises, and vice versa? Explain this relationship in the context of a small restaurant ( up to 10 tables in the restaurant ). Support your answer with one table and one graph containing plausible data a you make up for this imaginary restaurant.

Answer 1

In the short run, marginal product of labour and the marginal cost are inversely related. This is due to the working of Law of Diminishing Marginal Productivity(DMP). According to the law of DMP, it can be seen that with an additional input/improvement in a factor of production, the increase in output associated with this change will marginally increase for some time but then would start reducing eventually.

For example, talking about a small restaurant with 10 tables. Initially, with 1 cook, the waiting time per table would be let’s say 10 mins. But as we increase cooks in the kitchen, the works gets divided between these cooks which helps them fulfil the orders faster. Therefore reducing waiting time per table. This will improve revenue of restaurant as more people can be served. This improved performance will continue till a particular time. Once the maximum efficiency is reached, adding more cooks will complicate the kitchen arrangement, reducing the productivity of each chef. This may be due to increased chaos in the kitchen, less work available than the cooks available or simple reduced team work due to excessive chefs. Therefore, the waiting time will again start to rise and thus revenue will reduce.

Law of diminishing marginal productivity or the law of diminishing returns is activated in this process.

No of Tables	No of Chefs	Revenue	Marginal Product (Revenuet - Revenuet-1)
10	1	100	-
10	2	200	100
10	3	320	120
10	4	460	140
10	5	460	0
10	6	350	-110
10	7	200	-150

The eventual decrease in Marginal Returns/Marginal Product is because every additional increase in Labour/Chef is less productive. An addition for 1 cook from 5 to 6 will bring down productivity and thus the revenue by 110.