Question 6 [10]

6.1. Illustrate the relationship between production and costs with an applicable diagram

consisting of two graphs, one below the other. (6)

Tip: The graphs have to reflect the shapes of the marginal product (MP) and average

product (AP) of labour curves (related to quantity of labour), as well as the shapes of

the marginal cost (MC) and average variable cost (AVC) curves (related to the units of

output).

6.2. What happens to the MP of labour curve as the quantity of labour increases? To what well-known microeconomic law can this phenomenon be attributed? (2)

6.3. Explain what effect this same microeconomic law will have on MC and AVC. (2)