The company's CFO, Fred Mertz, wants to see a 25% increase in net income over the next year. In other words, his target for next year's net income is $2,250,000. Mertz has made the following observations: - Ricardo's operating margin (EBIT/Sales) was 37.5% this past year. Mertz expects that next year this margin will increase to 40%. - Ricardo's interest expense is expected to remain constant. - Ricardo's tax rate is expected to remain at 40%.

In the short-run, marginal costs are equal to the change in variable costs as output changes. ( mc = change in variable cost / change in quantity) assume that capital is fixed in the short-run. (a) start with the equation for marginal cost and derive an equation that relates marginal cost of production to the cost and productivity of labor. (b) draw a standard looking short-run marginal cost curve and use the equation you derived to explain its shape.