Suppose Jodi's widget business is using two inputs, labour and capital. Which of the following would happen if the price of labour increased?
A) Jodi would hire more labour.
B) The firm's marginal cost curve will remain unchanged.
C) The firm's average total cost curve will shift upward.
D) The firm's average fixed cost curve will shift upward.
E) Jodi will shut down her business.

Question

Quizplus · Accepted Answer

As the price of labour increases, Jodi's costs of production will increase. This means that the firm's average total cost curve will shift upward. This is because the firm will have to pay more for each unit of labour, resulting in higher costs for producing each unit of output. This will increase the firm's average total cost, which is the total cost of production divided by the quantity produced. Hiring more labour (A) is unlikely, as the increase in price will make each unit of labour more expensive. The marginal cost curve (B) may or may not be affected depending on the specifics of the production function. The average fixed cost curve (D) is unlikely to be affected as it only reflects fixed costs such as rent and equipment. Shutting down the business (E) is unlikely as Jodi may still be able to produce at a profit, albeit at a higher cost.

Suppose Jodi's Widget Business Is Using Two Inputs, Labour and Capital