Refer to the following:
The following graph shows the marginal and average product curves for labor, the firm's only variable input. The monthly wage for labor is $2,800. Fixed cost is $160,000.

-When the firm uses 120 units of labor, what is its marginal cost at this output?
A) $65
B) $70
C) $50
D) $56
E) $120

Question

Refer to the following:
The following graph shows the marginal and average product curves for labor, the firm's only variable input. The monthly wage for labor is $2,800. Fixed cost is $160,000.
 
-When the firm uses 120 units of labor, what is its marginal cost at this output?
A) $65 
B) $70 
C) $50 
D) $56 
E) $120

Quizplus · Accepted Answer

From the graph, we can see that at 120 units of labor, the marginal product of labor (MPL) is approximately 70. Therefore, the marginal cost (MC) at this output level is equal to the wage rate ($2,800) divided by MPL, which is approximately $40 per unit of output (2800/70). However, we also need to consider fixed costs in calculating total cost and average variable cost (AVC). At 120 units of labor, total output (Q) is approximately 175, which means that average product of labor (APL) is approximately 1.46 (175/120). Multiplying APL by the wage rate gives us AVC, which is approximately $4,088 (1.46 x $2,800). To calculate total cost (TC), we add fixed costs ($160,000) to AVC multiplied by the quantity of labor used (120), giving us approximately $693,600. Finally, dividing TC by Q gives us average cost (AC), which is approximately $3,960 ($693,600/175). Therefore, the firm's best choice is to produce at a quantity of 175 units of output, where MC = $56 (as seen from the graph) and MC = AVC = AC.

Refer to the Following