Assume that labor is the variable input for a firm.Which of the following will occur if the wage rate increases?
A)Its average variable cost,average fixed cost,average total cost,and marginal costs will increase.
B)Its average variable cost and average total costs will increase and profits will decrease.
C)Its marginal cost,average total costs,and output will increase.
D)Its marginal cost and average variable costs will increase.

Question

Quizplus · Accepted Answer

When the wage rate (the cost of labor) increases, the firm's variable costs increase. As labor is a variable input, an increase in wage rate will lead to an increase in the marginal cost of production. Additionally, the firm's average variable cost (AVC) will increase since AVC includes the cost of labor. However, the average fixed cost (AFC) remains constant in the short run. Furthermore, the average total cost (ATC) will increase due to the increase in AVC. Profit may decrease, but it depends on how much the price of the product changes in response to the increase in costs.

Assume That Labor Is the Variable Input for a Firm