1. Chapter 5 Section 2

2.  Marginal Product of Labor ◦ The change in output from hiring one additional unit of labor  Increasing Marginal Returns ◦ Workers increase, marginal production of labor increases  Decreasing Marginal Returns ◦ Workers increase, marginal production of labor decreases

3. Labor (# of workers)Output (beanbags per hour) Marginal Product of Labor 00- 144 2106 3177 4236 5285 6313 7321 831

4.  Fixed Costs (FC) ◦ A cost that does not change, no matter how much of a good is produced ◦ Example: building, equipment, property taxes, salary of employees  Variable Costs (VC) ◦ A cost that rises or falls depending on the quantity produced ◦ Example: raw material; wages of employees; utility bills

5.  Total Cost (TC) ◦ The sum of fixed costs plus variable costs  Marginal Cost (MC) ◦ Additional cost of producing one more unit

6.  Marginal Revenue (MR) and Marginal Cost (MC) ◦ Marginal Revenue  The additional income from selling on more unit of a good ◦ BEST level of output is where Marginal Revenue is equal to Marginal Cost ◦ MR=MC

7.  Responding to Price Changes ◦ If price of good changes, production will change accordingly ◦ If a goods price changes from $10 to $20, the firm would increase production so the marginal cost would equal the higher price

8.  The Shutdown Decision ◦ Firm produces at the most profitable level MR=MC ◦ Market price is so low that total revenue is less than total cost ◦ To shut down or not  Shutdown if Total Revenue (TR) is less than Variable Cost (VC)  Keep running is TR > VC  Why???????????

9.  MC = New TC – Previous TC  TR = MR x amount of good  Profit = TR - TC