Question

You operate a car detailing business with a fixed amount of machinery (capital), but you have recently altered the number of workers that you employ per hour. Three employees can generate an average product of 6 cars per person in each hour, and four employees can generate an average product of 5 cars per person in each hour.  If the wage is $10 per hour, what is the marginal cost as you increase the labor from three to four employees?

	A.	MC = $2.5
	B.	MP = $1
	C.	MC = $10
	D.	MC = $5

Answer 1

Ans: D) MC = $5

Explanation:

At the employment of 3 workers , total product = Average product per worker * Number of worker = 6 * 3 = 18

At the employment of 4 workers , total product = Average product per worker * Number of worker = 5 * 4 = 20

At the employment of 3 workers , total cost = Number of workers * Wage rate = 3 * $10 = $30

At the employment of 4 workers , total cost = Number of workers * Wage rate = 4 * $10 = $40

Marginal Cost = Change in total cost / Change in output

= ( $40 - $30 ) / ( 20 -18 )

= $10 / 2

= $5