Final answer:
The marginal cost of a cup of coffee to a manager is the extra cost incurred to produce one additional cup. This figure is crucial for decision-making on pricing and production levels, as it must be weighed against the additional revenue that the extra cup could generate to ensure profitability.
Step-by-step explanation:
The marginal cost of a cup of coffee represents the additional expense for a coffee shop manager to produce one more cup of coffee. This is not the average cost of producing all cups, but rather the cost tied specifically to the creation of an additional cup. Calculating marginal cost involves taking the change in total cost and dividing it by the change in the amount of coffee produced. For instance, if producing an additional 20 cups increases total costs from $320 to $400, the marginal cost per cup is calculated as ($400 - $320) / 20, which equals $4 per additional cup.
This concept is pivotal for managers when assessing production levels. An upward-sloping marginal cost curve is typical due to diminishing marginal returns, where additional units cost more to produce because of factors like increased labor hours or more intensive use of equipment. Managers compare the marginal cost to the extra revenue earned from selling an additional cup of coffee to determine whether the sale will add to the shop's profits. There may be instances where the marginal cost decreases, indicating increasing marginal returns, but this situation is usually short-lived and followed by a rise in costs as production increases.
Understanding when marginal cost equals average cost is critical for managers because it signifies the production level at which average costs are minimized, and beyond which the marginal cost of producing an extra unit will surpass the average cost.