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Homework answers / question archive / The relationship between marginal physical product and marginal cost Manuel's Big Burger is a small restaurant that sells hamburgers

The relationship between marginal physical product and marginal cost Manuel's Big Burger is a small restaurant that sells hamburgers

Economics

The relationship between marginal physical product and marginal cost Manuel's Big Burger is a small restaurant that sells hamburgers. For Manuel, grills are a fixed input and workers are variable inputs. Assume that laboris Manuel's only variable cost. Manuel has a fixed cost of $100 per day and pays each of his workers $100 per day. Manuel's total product schedule and total cost at each level of labor are presented in the following table. Fill in the blanks to complete the Marginal Physical Product of Labor column for each worker and the Marginal Cost column at each level of labor. (Hint: Marginal cost is the change in total cost divided by the change in the quantity of output. You can calculate it here by dividing the increase in total cost from hiring one more worker by the marginal physical product from hiring one more worker.) Quantity of Labor (Workers) Quantity of Output (Burgers per day) Marginal Physical Product of Labor (Burgers per day) Total Cost (Dollars per day) Marginal Cost (Dollars per burger) 0 0 $100 1 50 $200 2 150 $300 3 200 $400 4 225 $500 5 235 $600 When hiring the first and second workers, Manuel's Big Burger faces marginal returns to labor. Over the range of workers for which the marginal product of labor is decreasing, Manuel's Big Burger faces marginal cost.

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Marginal physical product of labour is the additional output to the total output from the employment of an additional unit of labour

Marginal physical product of labour = Change in total output/ change in labour

Marginal cost is the additional cost to the total cost from the production of an additional unit of output.

Marginal cost = Change in total cost / change in output

Or

Marginal cost = change in total cost/change in marginal physical ptoduct

Labour output Marginal physical product of labour Total cost Marginal cost
0 0 ...... 100 .....
1 50 50 200 2
2 150

100

 300 1
3 200 50 400 2
4 225 25 500 4
5 235 10 600 10

* When hiring the 1st and 2nd workers, Manuel's Big Burger faces increasing marginal returns to labour.

Reason : when the firm uses the 1st unit of labour, the marginal physical product = 50

When the firm uses the second unit of labour, marginal physical product of labour = 100

Increasing marginal returns to labour means each additional unit of labour increases the total output at an increasing rate which means the marginal physical product is increasing.

When firm increases labour unit from 1 to 2, marginal physical ptoduct increased from 50 to 100. Therefore there is increasing marginal returns to labour

* Over the range of workers for which the marginal product of labour is decreasing, Manuel'ss Big Burger faces increasing marginal cost.

Reason : the marginal physical product of labour is decreasing from the employment of 3rd unit of worker to the 5th unit of worker. Over this range of workers, marginal physical product decrease from 50 to 10. Also the marginal cost increased from 2 to 10

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