1.
1a) (8 points) Assume all employees are paid the same wage. A decreasing marginal product of
labor, while still a positive number, tells us that marginal cost must be increasing. Indicate
whether you believe the last statement is True or False , and then briefly explain your answer.
1b) (8 points) A watch manufacturer finds that at 1,000 units of output, its marginal costs are
below average total costs. If it produces one additional watch, will its average total costs rise,
fall, or stay the same? Support your answer.
Solution
Yes.
MC = w ? MPL
Thus if the marginal product of labor is rising then marginal costs will be falling and if the
marginal product of labor is falling marginal costs will be rising (assuming a constant wage rate).
A watch manufacturer finds that at 1,000 units of output, its marginal costs are below average
total costs. If it produces one additional watch, will its average total costs will rise