Question

Scenario 10.5:

A firm produces garden hoses in California and in Ohio. The marginal cost of producing garden hoses in the two states and the marginal revenue from producing garden hoses are given in the following table:

      California             Ohio

    Qc        MCc      Qo     MCo    Qc + o   MR   

     1            2           1         3            1        24

     2            3           2         4            2        20

     3            5           3         6            3        16

     4            9           4         8            4        12

     5          16           5       12            5          8     

     6          24           6       17            6          4

21) Refer to Scenario 10.5. From the perspective of the firm, what is the marginal cost of the 5th garden hose?

A) 4

B) 5

C) 16

D) 12

why the answer is B

Answer 1

Marginal Cost of producing 5th garden hose.

The firm will produce garden hose at the minimum marginal cost.

The first garden hose will be produced in California at $2. This is because the marginal cost of first garden hose is lower in California than in Ohio.

The second garden hose will be produced in California/Ohio at $3. The firm will indifferent between California and Ohio because the MC of the first hose in Ohio and MC of the second hose in California is same.

The third garden hose will be produced in California/Ohio at $3. Depending on the second hose.

Till now two hoses have been produced in California and one in Ohio.

The fourth garden hose will be produced in Ohio at MC of $4. This is because the marginal cost of third garden hose in California($5) is greater than MC of the second hose in Ohio($4).

The fifth garden hose will be produced in California at MC of $5. This is because the marginal cost of the third garden hose is lower in California than MC of the third hose in Ohio.