Question

Suppose you work for a firm and you notice that the marginal product of labor is decreasing as more labor is hired. Does this mean that the average product of labor must be decreasing too? Provide a reasoning for your response.

Answer 1

No, marginal product of labor decreasing as more labor is hired does not mean that the average product of labor must be decreasing too.

The total quantity of output produced per unit of labor, holding all other inputs fixed is the average product of labor. The marginal product of labor is the change in the total output resulting from the change in the number of labor.

When the marginal product of labor is decreasing the average product of labor may increase, decrease or remain the same. Let's see why this can happen through an example. Consider the table below:

Labor	Total Product	Average Product	Marginal Product
0	0	0	0
1	4	4	4
2	10	5	6
3	17	5.66	7
4	23	5.75	5

In the table above, average product is calculated by Total Product/Total Labor i.e for the first unit, average product = 0 /0= 0, second unit, marginal product = 4/1 = 4. etc.and Marginal Product is calculated by change in total product when one unit of labor is added i.e for the first unit, marginal product = 4 - 0 = 4, second unit, marginal product = 10 - 4 = 6. etc.

So, in the table above, we see that even though the marginal product is decreasing from 7 to 5 for the fourth unit of labor, the average product of labor is infact rising from 5.66 to 5.75. This is because the marginal product first increases reaches a maximum point and then starts to fall whereas the average product still rises or remains the same where the marginal product is maximum and after a point it starts to decrease.