labor market, it can offer any wage that it wishes. However, because they face the market supply curve for

labor, if they want to hire more workers, they must raise the wage they pay. This creates a quandary, which we

can understand by introducing a new concept: the marginal cost of labor. The marginal cost of labor is the

cost to the firm of hiring one more worker. However, here is the thing: we assume that the firm is determining

how many workers to hire in total. They are not hiring sequentially. Let’s look how this plays out with the
334 14 • Labor Markets and Income

example in Table 14.5.

Supply of Labor

1

2

3

4

5

Wage Rate

$1 per hour $2 per hour $3 per hour $4 per hour $5 per hour

Total Cost of Labor

$1

Marginal Cost of Labor $1

$4

$3

$9

$5

$16

$7

$25

$9

TABLE 14.5 The Marginal Cost of Labor

There are a couple of things to notice from the table. First, the marginal cost increases faster than the wage
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