Question:
Consider that a firm employs variable amounts of labour to a fixed amount of capital. If the daily wage paid to labour increases, how does this affect the firm’s cost?
(1) Dec / No change / Dec
(2) Dec / Dec / Dec
(3) Inc / Dec / No change
(4) Inc / No change / Inc
(5) Inc / Inc / Inc
Correct Answer:
(4)
Answer Explanation:
Labour is a variable factor of production, meaning wages are a Total Variable Cost (TVC). Capital is a fixed factor, meaning its cost is a Total Fixed Cost (TFC). An increase in wages directly increases the TVC. Because the cost of capital hasn’t changed, TFC remains unchanged. Since Total Cost = TVC + TFC, the Total Cost must also increase.
Topic: Costs of Production Year: 2019
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