Question

Suppose a firm is using two inputs, labor and capital. What will happen if the price of labor falls?

• A. The firm's average cost curve will shift downward.
• B. The firm's marginal cost curve will shift downward.
• C. To produce an unchanged output, the firm would use more labor
• D. All of the above

Answer 1

Answer: (D)

All of the above

If the price of labour falls it means it is now cheaper to employ labour that it is to deploy capital. As average cost is equal to total cost divided by quantity produced, average cost curve will shift down. Further,ore, as it is now cheaper to produce every additional unit, marginal cost curve will also shift downwards.