(1) (b) Using a fully labeled diagram, outline the relationship between marginal product (MP) and average product (AP) of labor.
Understand that as MP is above the AP it must be pulling the average (AP) up, as the marginal product intersects the AP the two are equal, when the MP is below the AP it pulls the AP down.
Think of it like this – if there is a group of people in a room and all of them are 6 feet tall – the average in the room is obviously 6 feet.
If the marginal (additional) person (MP) walks into the room and is above the average 8ft tall then the average (AP) increases.
If the marginal (additional) person (MP) walks in the room and is below the average 5ft tall then the average (AP) falls.
**Marginal product will fall (due to diminishing returns) will intersect the AP curve at its maximum, because if the MP>AP then AP increases and if MP<AP then AP will decrease.
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