The additional cost incurred for the production of one more unit of a product or service is called _

Question

The additional cost incurred for the production of one more unit of a product or service is called _____________ .

Examoogle · Accepted Answer

Marginal cost

Explanation: Marginal cost is defined as the change in total cost resulting from the production of one additional unit of output. It represents the incremental cost of increasing production by a single unit.

Working Principle: The principle relies on the derivative of the total cost function $TC(Q)$ with respect to the quantity $Q$. As production levels fluctuate, total cost changes due to variable components; the marginal cost captures the instantaneous rate of this change, helping firms determine optimal production levels where $MC = MR$.

Key Formulas: $MC = \frac{\Delta TC}{\Delta Q}$ — Discrete calculation for change in cost per unit change in quantity; $MC = \frac{d(TC)}{dQ}$ — Calculus-based definition for continuous cost functions

Key Points: Marginal cost is independent of fixed costs because fixed costs do not change with output.; The MC curve typically follows a U-shape due to the law of diminishing returns.; It is a critical decision-making tool for profit maximization strategies in microeconomics.; If $MC  Average Cost$, the average cost increases.

Advantages: Helps in determining the exact output level for profit maximization.; Assists in competitive pricing strategies.

Disadvantages: Does not account for fixed cost recovery in the short run.; Requires accurate data on incremental changes which can be difficult to measure.

Applications: Determining optimal production output in manufacturing.; Setting service pricing in telecommunications and power distribution.; Analyzing production efficiency.

Additional Info: Fixed cost: Costs that remain constant regardless of the volume of production (e.g., rent).. Variable cost: Costs that vary directly with the level of output (e.g., raw materials).. Average cost: Total cost divided by the number of units produced.. Option A (Fixed Cost) is incorrect as it does not change with additional output.

Answer: C is correct — Marginal cost refers to the incremental cost incurred by increasing output by one unit.

Exam Tip: Always remember that Marginal Cost is the derivative of Total Cost; in exam problems involving supply chains, if given a cost equation, differentiate it once to find the MC.

Related Questions

Discussion (0)