Marginal cost is correctly defined as
- A.total cost divided by total output
- B.the change in total cost divided by the change in output
- C.total fixed cost divided by total output
- D.the change in total revenue divided by the change in output
Correct answer
Explanation
The correct answer is B, the change in total cost divided by the change in output. Marginal cost is the addition to total cost from producing one more unit, so for a one unit change it is simply the difference between successive values of total cost. Because total fixed cost does not change with output, the whole of this addition comes from variable cost, which is why marginal cost can equally be computed from total variable cost. Option A is wrong because total cost divided by output is average cost. Option C is wrong because total fixed cost divided by output is average fixed cost, which falls continuously. Option D is wrong because the change in total revenue divided by the change in output is marginal revenue, the revenue side counterpart of marginal cost, and the two are equated at the equilibrium output.
Read the full article: Production, Cost and Revenue: Concepts and Formulas
Practice Questions
View allWhich of the following costs remains the same at every level of output in the short run?
- A.Total variable cost
- B.Total fixed cost
- C.Marginal cost
- D.Average cost
Show answer
Fixed cost is the payment for factors that cannot be varied in the short run, such as the rent of the factory building, insurance and the salary of permanent staff, and it has to be met even when output is zero, which is why it is also called supplementary or…
Read the full explanation →As the level of output increases, the average fixed cost of a firm
- A.remains constant
- B.rises continuously
- C.falls continuously but never becomes zero
- D.first falls and then rises
Show answer
Average fixed cost is total fixed cost divided by output; the numerator is unchanged, so a larger output spreads the same fixed cost over more units.
Read the full explanation →The marginal cost curve cuts the average cost curve at
- A.the minimum point of the average cost curve
- B.the maximum point of the average cost curve
- C.the point where average cost equals average fixed cost
- D.no point at all
Show answer
The reason is arithmetic rather than economic: so long as marginal cost is below average cost, each extra unit pulls the average down, and once marginal cost rises above average cost the average must rise, so the two can only be equal where the average is at its lowest.
Read the full explanation →The law of variable proportions operates in which situation?
- A.When all factors of production are increased in the same proportion
- B.When one factor is varied and the others are held fixed
- C.Only in the long run
- D.Only when the firm is in equilibrium
Show answer
This is the defining condition of the short run, where plant and machinery cannot be changed, so only the proportion between the variable factor and the fixed factor alters.
Read the full explanation →Under perfect competition, the average revenue of a firm is equal to
- A.total cost
- B.marginal cost only
- C.price and marginal revenue
- D.half the price
Show answer
A firm in perfect competition is a price taker because its output is a negligible part of the market, so it can sell any quantity at the ruling price.
Read the full explanation →