# what is the marginal cost of going from 2 workers per day to 3 workers per day?

a. Complete the table by calculating the Total Product of Labor (total output of the firm) and Marginal Product of Labor corresponding to each number of workers.See the table. TP =

a. Complete the table by calculating the Total Product of Labor (total output of the firm) and Marginal Product of Labor corresponding to each number of workers.

See the table. TP = (AP) times (Number of workers); MP is the difference between two successive numbers in the TP column.

b. At which worker does the Law of Diminishing Marginal Returns start working? How do you know?

Law of DMR starts working when MP starts decreasing. As we can see from the table, it happens when the firm hires the fourth worker (an alternative answer - "after the firm hires the third worker"; phrasing it either way is fine).

c. Using the Greasy Wrench example, explain why every firm, as it hires more people in an attempt to increase its output, will sooner or later hit the range of diminishing marginal returns.

Law of DMR is present only in the short run, when some of the firm's inputs are fixed. Greasy Wrench has limited space (and probably fixed amount of equipment). As a result, as more workers are hired, there will eventually be shortage of space, or equipment, to work with. The capital-labor ratio will no longer be optimal, and the increase in the output attributed to an additional worker starts to decrease.

d. When Mr. Wei's son looked at the table, he said to his dad: "Hiring 5th and 6th person makes no sense!" Do you agree? Explain.

The fifth worker does not add as much to the output as the fourth worker does. However, this does not necessarily mean that hiring him is a bad idea. Once again, everything will depend on how much a worker costs and what is the dollar value of his marginal product. So Mr. Wei Junior may be wrong.

e. Currently, "Greasy Wrench" employs 3 workers, each of whom is paid \$200 a day. Determine the average labor cost of repairing a car.

3 workers cost the firm 3 times \$200 = \$600. That is our total labor cost. To determine the average cost, we need to divide total cost by the number of cars fixed. With three workers employed, 30 cars are fixed daily. The average labor cost of fixing a car = \$600/30 = \$20.

2. The information about the costs of a firm is given below.