Question

As a determinant of firm's supply curve, if the wage rate of labour increases the firm's marginal cost curve will shift?

• A. Upward
• B. Downward
• C. Rightward
• D. Constant

Hint:

Input price increases \(\implies\) Cost curves shift upward \(\implies\) Supply curve shifts leftward (decreases).

Answer 1

The Correct Option is A

Concept:
The supply curve of a competitive firm is derived directly from its marginal cost curve.
The marginal cost of production depends fundamentally on the prices paid for variable factor inputs, such as labor wages.

Step 1: Impact of Wage Rate on Marginal Cost:
Marginal cost (\(MC\)) represents the additional cost incurred when producing one extra unit of output: \[ MC = \frac{w}{MP_L} \] where \(w\) denotes the nominal wage rate of labor and \(MP_L\) is the marginal product of labor.
When the market wage rate of labor rises, the expense of employing labor to produce additional units increases.

Step 2: Direction of Curve Shift:
At any given level of output, the marginal cost is now higher than before.
Graphically, an increase in cost per unit of output shifts the entire marginal cost curve vertically upward (which also corresponds to an inward/leftward shift).
Final Answer:
An increase in the wage rate causes the firm's marginal cost curve to shift upward. Therefore, option (A) is correct.