In: Economics
In the short run a firm can produce 11 units of output by employing 2 units (hours) of labour and 15 units of output employing 3 units of labour. Suppose the hourly wage rate is $10. What is the marginal cost of producing the 14th unit of output? Clearly show all steps of your work.
Total cost of producing 11 units = Labor hours × Hourly rate
= 2 × 10
= $20
Total cost of producing 15 units = Labor hours × Hourly rate
= 3 × 10
= $30
Marginal cost of producing 15th unit = Difference in total cost / Difference in units
= (30 – 20) / (15 – 11)
= 10 / 4
= 2.5
Total cost of producing 14 units = Total cost of producing 15 units - Marginal cost of producing 15th unit
= 30 – 2.5
= 27.5
Marginal cost of producing 14th unit = (TC of 14 units – TC of 11 units) / Difference in units
= (27.5 – 20) / (14 – 11)
= 7.5 / 3
= 2.5
Answer: $2.5
Note: TC means total cost.