Question

Explain the relationship between the marginal product of variable inputs (like labor) and the marginal costs of production. Do they affect each other, or does one cause the other? Are there possible situations where the marginal costs of production do not rise? If so, what does that mean for the marginal product of the inputs or the price of these inputs?

Answer 1

Marginal product of variable inputs like labor, means number of additional units of product produced by one additional labor. At the same time, marginal cost of production, refers to the additional cost incurred to produce one more unit of output. When marginal product of labor increases, then it leads to increase in workers productivity. As a result,  cost incurred to produce one unit, decreases. So, marginal cost of production also decreases. Hence, there is a causative and negative relationship between the marginal product of labor and marginal cost of production. With increase in marginal product of labor, marginal cost of production decreases and vice versa.

Marginal cost of production does not rise, in a scenario, when variable cost is constant and proportional to the output being produced and or variable cost is zero and only fixed cost in present. In this case, marginal cost of production does not rise. It causes marginal product of input to change in the proportion of the change in marginal cost. So, the profit maximizing output will be produced when MR = MC. Price of these inputs are not increasing in the given scenario.