Assume that wages are $20 per hour; at the current number of hours of labor employed, the marginal product of an hour of labor is 10 units of output. Labor is the only variable input. What will happen to marginal cost if you hire one more hour of labor and the marginal product of the next hour of labor employed increases to 15 units of output?
Answer: If an hour of labor produces 10 more units of output in an hour and that hour of labor costs $20, the marginal cost is (1 hour x $20) / 10 units of output. That is equal to a marginal cost of $2 per unit. If the next hour of labor’s marginal product increases to 15 units per hour, the marginal cost will fall to $1.33 per unit. (1 hour x $20) / 15 units of output = $1.33 per additional unit of output.