The marginal factor cost of the third laborer is _____ if the labor supply curve faced by a firm has the following wage-quantity coordinates: $$\begin{array} { l l l l l }
\text { Quantity of Labor Supplied: } & 1 & 2 & 3 & 4 \
\text { Reservation Wage Rate } & 5 & 10 & 15 & 20
\end{array}$$
A)15
B)25
C)30
D)Cannot be determined until the nature of the product market is known

Question

The marginal factor cost of the third laborer is _____ if the labor supply curve faced by a firm has the following wage-quantity coordinates: $$\begin{array} { l l l l l } 
\text { Quantity of Labor Supplied: } & 1 & 2 & 3 & 4 \
\text { Reservation Wage Rate } & 5 & 10 & 15 & 20
\end{array}$$
A)15
B)25
C)30
D)Cannot be determined until the nature of the product market is known

Quizplus · Accepted Answer

The marginal factor cost (MFC) of the third laborer is the additional cost to the firm for hiring one more laborer, which is the difference in total wage costs before and after hiring the third laborer. Initially, for two laborers, the total wage cost is $5 + 10 = 15$. With three laborers, the total wage cost is $5 + 10 + 15 = 30$. Therefore, the MFC for the third laborer is $30 - 15 = 15$. However, because the firm must increase the wage for all previous workers to the new higher wage to attract the third worker, the actual calculation should account for the increased wages paid to all workers, not just the third. Thus, for three workers, each paid at the third worker's reservation wage (15), the total cost is $3 \times 15 = 45$. The cost for two workers at the second worker's reservation wage (10) would have been $2 \times 10 = 20$. Therefore, the MFC for the third worker is $45 - 20 = 25$, not just the reservation wage of the third worker.