Question about marginal productivity &labor cost?
Explain why firms that find the marginal productivity of their labor force falling will probably find that their costs are rising.
Answer:
marginal productivity is the difference in output per worker for the last person employed.
example:
at 4 workers the firm produce 6 units of a good, therefore output per worker is 6/4 = 1.5
at 5 workers the firm produce 10 units of a good, therefore output per worker is 10/5 = 2
at 6 workers the firm produce 11 units of a good, therefore output per worker is 11/6 = 1.833...
marginal productivity for
5 workers is 2 - 1.5 = 0.5
6 workers is 1.833 - 2 = -0.167
thus when marginal productivity is falling, output per worker is dropping. this implies that the additional worker employed is giving diminishing returns to output although the wage paid is the same (assume that wage is same for all workers)
therefore cost is increasing proportionately to the number of workers, but output is not increasing proportionately to the number of workers. and as such, costs are rising (cost of a unit of good produced by 6 workers is higher than cost of a unit of good produce by 5 workers ) due to inefficency.
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Answer:
marginal productivity is the difference in output per worker for the last person employed.
example:
at 4 workers the firm produce 6 units of a good, therefore output per worker is 6/4 = 1.5
at 5 workers the firm produce 10 units of a good, therefore output per worker is 10/5 = 2
at 6 workers the firm produce 11 units of a good, therefore output per worker is 11/6 = 1.833...
marginal productivity for
5 workers is 2 - 1.5 = 0.5
6 workers is 1.833 - 2 = -0.167
thus when marginal productivity is falling, output per worker is dropping. this implies that the additional worker employed is giving diminishing returns to output although the wage paid is the same (assume that wage is same for all workers)
therefore cost is increasing proportionately to the number of workers, but output is not increasing proportionately to the number of workers. and as such, costs are rising (cost of a unit of good produced by 6 workers is higher than cost of a unit of good produce by 5 workers ) due to inefficency.
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