In the short-run, Airbus manufactures aircraft at its existing factories; howeve
ID: 2965427 • Letter: I
Question
In the short-run, Airbus manufactures aircraft at its existing factories; however, labor and other inputs such as those components purchased from suppliers (engines are one example) are variable. Airbus has received a substantial number of new orders and will increase its monthly aircraft production rate. Explain why the MPL will decrease above some level of labor as more workers are added. How does this decrease in the marginal product of Labor (MPL) result in an increase in the Marginal Cost (MC)?
Explanation / Answer
a) As the ?rm hires more workers, the marginal product of a worker decreases, so value of marginal product decreases. This is because, as more and more of the labor is combined with a given amount of fixed factor, each unit of labor has less and less of the fixed factor to work with. Each unit of labor gets a declining amount of capital or components to assist it in producing more output.. This is the law of diminishing returns.
b) Further, as each unit of labor adds the same amount to cost, but has a decreasing marginal product, it follows that when MPL is declining, MC is rising.
MC = delta(TC)/delta(Q), delta(TC) is constant, as workers add same cost, but delta(Q) is falling, because of diminishing returns (as explained earlier)