Labor costs represent a large percentage of total costs for many firms. According to data from the Bureau of Labor Statistics, U.S. labor costs were up 2.0% in 2015, compared to 2014.

a. When labor costs increase, what happens to average total cost and marginal cost? Consider a case in which labor costs are only variable costs and a case in which they are both variable and fixed costs. An increase in labor productivity means each worker can produce more output. Recent data on productivity show that labor productivity in the U.S. nonfarm business sector grew by 1.7% between 1970 and 1999, by 2.6% between 2000 and 2009, and by 1.1% between 2010 and 2015.
b. When productivity growth is positive, what happens to the total product curve and the marginal product of labor curve? Illustrate your answer with a diagram.
c. When productivity growth is positive, what happens to the marginal cost curve and the average total cost curve? llustrate your answer with a diagram.
d. If labor costs are rising over time on average, why would a company want to adopt equipment and methods that increase labor productivity?

Answer: Labor cost is a representative of greater percentage of total cost for many firms. From the data of Bureau of Labor statistics, the U.S labour cost up to 2% in 2015 in comparison to 2014.

Explanation:

A. As labor increases, average total cost and marginal cost increases as well due to the fact that labor is part of total cost of production. If labor cost represents only variable cost when firms shut down, labor cost will be save but if it represents but variable and fixed cost, labor cost can't be avoided.

B. A positive productivity growth lead to a total product curve and marginal labor curve shift upward because total output and marginal product of labor curve increases.

C. A positive productivity curve will result in an downward shift of marginal cost curve and average total cost curve because average total cost and marginal cost decreases per output.

D. If labor cost are rising overtime on average. equipments, technologies and methods that increases labor productivity will be adopted in order for total output and marginal product of labour to increase.