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A firm currently produces 500 units per day with 50 employees, each earning $20 per hour. To produce one additional unit, the firm must hire a 51st employee. To attract this new employee, the firm must increase the hourly wage to $21 for all of its employees. The marginal cost of producing this additional unit is $21.
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Formula for Marginal Cost in the Price-Setting Model
A firm currently employs 50 workers, each earning $15 per hour, to produce 1,000 widgets per day. To increase production to 1,001 widgets per day, the firm must hire one additional worker. To attract this new worker, the firm finds it must increase the hourly wage to $16 for all of its workers. What is the marginal cost of producing the 1,001st widget, considering only the change in hourly labor costs?
Components of Marginal Cost
Calculating Marginal Cost for a Production Increase
A firm currently produces 500 units per day with 50 employees, each earning $20 per hour. To produce one additional unit, the firm must hire a 51st employee. To attract this new employee, the firm must increase the hourly wage to $21 for all of its employees. The marginal cost of producing this additional unit is $21.
Definition of Eta (η) in Wage Setting