Question

Explain the concept of marginal factor cost. Why is the marginal factor cost higher than the wage rate?

Answer 1

Marginal factor cost is the change in total factor cost, when there is one additional increase in factor or input. Concept of marginal factor cost is applied, because there are many other factors that act to produce goods. When only labor as an input factor is considered, then it does not give the correct idea of the all the factors involved in production. So, marginal factor and its cost are applied to better understand the increase or decrease in factor cost, when additional inputs were used.

Marginal factor cost is higher than the wage rate, because wage rate is one factor of the marginal factor cost. Other factors may be utility expenses, rent of the facility among the other factors. It will make wage rate to be lower in comparison to the marginal factor cost.