An increase in labor productivity will:
a. increase labor cost per unit of output
b. increase fixed cost per unit of output
c. decrease labor cost per unit of output
d. increase average total cost
The correct answer and explanation is:
The correct answer is c. decrease labor cost per unit of output.
Explanation:
Labor productivity refers to the amount of output produced per unit of labor input, typically measured in terms of output per hour worked. When labor productivity increases, workers are able to produce more output in the same amount of time, or the same output in less time. This results in a decrease in labor cost per unit of output.
Labor cost per unit of output is calculated by dividing the total labor costs by the number of units produced. If workers are producing more output in the same amount of time, the labor cost per unit of output decreases because the same amount of labor is being used more efficiently. This reduction in labor cost per unit of output contributes to lowering the overall cost structure for businesses.
To understand the other options:
- a. increase labor cost per unit of output: This is incorrect because higher labor productivity reduces the labor cost per unit of output, not increases it.
- b. increase fixed cost per unit of output: Fixed costs do not change with the level of output. Therefore, an increase in labor productivity would not affect fixed costs per unit of output.
- d. increase average total cost: Average total cost is calculated by dividing total costs (both fixed and variable) by the number of units produced. If labor productivity increases, production becomes more efficient, leading to a reduction in variable costs per unit, which typically lowers the average total cost rather than increasing it.
Thus, the correct answer is c, as higher productivity means more output with the same labor input, reducing labor costs per unit of output.