Question

A firm's marginal cost represents:

Select one:

a. total cost divided by units of inputs

b. total cost divided by units of output

c. both a and b

d. the additional cost of producing one more unit of output

Answer 1

Marginal cost: Marginal cost refers to the additional cost to produce each additional unit. For example, it may cost $10 to make 10 cups of Coffee. To make another would cost $1. Therefore, that is the marginal cost – the additional cost to produce one extra unit of output.

The marginal cost comes from the cost of production. It includes both fixed and variable costs. In the case of fixed costs, they are only calculated from the marginal cost if they are needed to increase production. The variable cost is always Comes under the marginal cost.

Marginal cost calculated by the formula :

Marginal cost is calculated by dividing the change in total cost by the change in quantity.

Marginal cost =

change in the total cost / change in quantity

Example of marginal cost :

Herry owns a privately owned business called herry Motorbikes. In his first year of business, he produces and sells 10 motorbikes for $100,000, which cost him $50,000 to make. In his second year, he goes on to produce and sell 15 motorbikes for $150,000, which cost $75,000 to make.

First, we work out the change in the total price. This increase from $50,000 to $75,000; an increase of $25,000. Then we calculate the change in quantity which increases from 10 to 15; an increase of 5. We then divide the change in the total price ($25,000) by the change in quantity (5), which equals a marginal cost of $5,000 per motorbike.