Which of the following is an effect of an increase in the price of labor on a firm's cost curves?

• A. The average fixed cost curve shifts upward.
• B. The average variable cost curve shifts downward.
• C. The total cost curve shifts downward.
• D. The marginal cost curve shifts upward.

Answer: (D)

Verified step by step guidance

1. Understand that labor is a variable input in the short run, so changes in the price of labor affect variable costs, not fixed costs. Fixed costs remain constant regardless of labor price changes.
2. Recall that the average fixed cost (AFC) curve is calculated as \(\text{AFC} = \frac{\text{Fixed Cost}}{Q}\), where \(Q\) is output. Since fixed costs do not change with labor price, the AFC curve does not shift.
3. Recognize that the average variable cost (AVC) curve is calculated as \(\text{AVC} = \frac{\text{Variable Cost}}{Q}\). An increase in the price of labor raises variable costs, so the AVC curve shifts upward, not downward.
4. Understand that the total cost (TC) curve is the sum of fixed and variable costs: \(\text{TC} = \text{Fixed Cost} + \text{Variable Cost}\). Since variable costs increase with labor price, the total cost curve shifts upward, not downward.
5. Recall that marginal cost (MC) is the additional cost of producing one more unit of output, calculated as \(\text{MC} = \frac{\Delta \text{Total Cost}}{\Delta Q}\). An increase in labor price raises the cost of producing additional units, so the MC curve shifts upward.