Question

(A) Explain using the terms marginal cost (MC) and marginal revenue (MR), how a company's supply are affected by a price increase.

(B) Explain how a company's supply curve is reflected by the company's marginal cost (MC).

Answer 1

A).Marginal Cost is the cost which occured when an additional unit of goods or services produce, whereas Marginal Revenue is the amount gained by selling one more additional unit and when the company is in the position where MR=MC, so it indicates the profit is maximised.

A Increase in prices leads supply of a company in a way, that supply will increase and there is no more profit to be gained, so the producer will not able to produce an additional unit as the supply increases and if he do so it will not give more profits to the producer and Marginal Revenue of each additional unit will fall.

B).The Company'sCompany's supply curve is reflected by Marginal cost because a company can equates prices with Marginal cost and can easily find the per unit cost of production. Marginal cost reflects the quantity that will be produced at each price. The Decision of supply are mostly seen by Marginal cost of production. Hence, the sloping of supply curve upward indicates the high prices needs to takeover the high Marginal cost of production.