Question

Abel, Baker, and Charlie all run competing bakeries, where each makes loaves of bread. a. At Abel’s bakery, the marginal product of labor is 15, and the average product of labor is 12. Would Abel’s average product increase or decrease if he hired another worker? b. At Baker’s bakery, the marginal product of labor is 7, and the average product of labor is 12. Would Baker’s average product increase or decrease if he hired another worker? c. At Charlie’s bakery, the marginal product of labor is –12. Does this mean her average product must also be negative?

Answer 1

a. It would increase

If the Marginal product of labor is higher than the average product of labor then it means that for every additional person hired, production will increase more than it did when they hired the last person thereby increasing the average product. Production is increasing at an increasing rate. Abel should hire more people.

b. It would decrease

If the Marginal product of labor is less than the average product, this means that for every additional person hired, the additional production quantity is less than when they hired the last person therefore average product will decrease. Production is increasing at a decreasing rate. Baker should not hire more people.

c. It does not mean average product is also negative.

A negative marginal product means that for every additional person hired, the total production quantity reduces. This does not mean that average production will be negative. This in fact, is not possible. Charlie's Bakery cannot produce less than zero but they can produce less than they have been and this is what a negative marginal product of labor is.