Refer to Figure 10.2. This firm's marginal cost curve has shifted from MC₀ to MC₁. A profit-maximizing firm should ________ the amount of output produced and ________ its demand for labor.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) keep constant; increase

When a firm's marginal cost curve shifts, it indicates a change in the cost of producing additional units of output. If the shift suggests that the firm can produce at a lower marginal cost, the firm would increase its output to maximize profits. Increasing output typically requires more labor, hence the firm would also increase its demand for labor.