If the price of labor increases, what is the most likely effect on the average total cost (ATC), average variable cost (AVC), and marginal cost (MC) curves for a firm in the short run?

• A. All three curves shift downward.
• B. Only the MC curve shifts upward; ATC and AVC remain unchanged.
• C. Only the ATC curve shifts upward; AVC and MC remain unchanged.
• D. All three curves (ATC, AVC, and MC) shift upward.

Answer: (D)

Verified step by step guidance

1. Recall that the average total cost (ATC) is the sum of average fixed cost (AFC) and average variable cost (AVC), where AVC includes costs that vary with output, such as labor costs.
2. Understand that the marginal cost (MC) represents the additional cost of producing one more unit of output, which depends on the variable input prices, including the wage rate for labor.
3. Since labor is a variable input in the short run, an increase in the price of labor raises the variable cost per unit of output, causing the AVC curve to shift upward.
4. Because ATC = AFC + AVC, and AFC remains unchanged in the short run (fixed costs do not change), the increase in AVC leads to an upward shift in the ATC curve as well.
5. Similarly, the MC curve shifts upward because the cost of producing an additional unit increases with the higher wage rate, reflecting the increased marginal cost of labor.