Question

Suppose the short-run production function is q = 10 ∗ L. If the wage rate is $20 per unit of labor, then MC equals ______.

Answer 1

Given, Q = 10 * L,

When we employ 1 unit of labour,

Q = 10 * 1 = 10

Our total production is 10 units and total cost $20 i.e. 20*1, which is the wage of single labour.

Now, when we employ 2 units of labour,

Q = 10 * 2 = 20

Our total production is 20 units and the total cost is $40 i.e. 20*2, which is the wage of 2 labours.

Marginal cost is the cost of producing an additional unit of output.

Marginal Cost = Change in Total Cost / Change in Output

So, from the above details, we can see that when we employ 1 additional labour, output increases by 10 units and total cost increases by $20.

Marginal Cost = $20/10 = $2 per output

So, Marginal Cost is $2 per output.