Question

If labor is the only variable input of a firm and the marginal product of labor is falling, the firm will always product

A. more than the profit-maximizing level of output

B. less than the profit-maximizing level of output

C. at a level of output where average total cost is at a minimum

D. at a level of output where marginal costs are rising

E. at a level of output where average variable costs are falling

I know the right answer is D, but can anyone explain why?

Answer 1

There exists an inverse relationship between the marginal product and the marginal cost.

When marginal product is increasing then marginal cost is decreasing.

When marginal product is at its maximum, the marginal cost is at its minimum.

When marginal product is decreasing then marginal cost is increasing.

If the labor is the only variable input of the firm and the marginal product of labor is falling then, in that case, marginal cost would be rising.

So,

In such case, the firm will always produce at a level of output where marginal costs are rising.

Hence, the correct answer is the option (D).