Question

A perfectly competitive firm produces 100 units of output. It faces a total fixed cost of ~5,000. The average variable cost (AVC) of production at this output is 10. When production rises to 110, the total cost of production is ~6,070. Then at this point:

a. Marginal cost is 50
b. Marginal cost is 70
c. Marginal cost is 80
d. Marginal cost is 60

Answer 1

The marginal cost when production increases from 100 to 110 units is calculated by the change in total cost divided by the change in output, resulting in a marginal cost of 7, not 60 as was initially stated.

Step-by-step explanation:

We calculate the marginal cost (MC) by assessing the change in total cost when an additional unit of output is produced. In the scenario presented, where production rises from 100 to 110 units, the total cost similarly rises from ~5,000 to ~6,070. The total variable cost (TVC) at 100 units can be determined by taking the average variable cost (AVC) multiplied by the quantity (Q), which equals 10 x 100 = 1,000.

Therefore, the total cost (TC) at 100 units is the sum of total fixed cost (TFC) plus the TVC, which adds up to 5,000 (TFC) + 1,000 (TVC) = 6,000. With the new total cost at 110 units being 6,070, the increase in TC when producing these additional 10 units is 6,070 - 6,000 = 70. Consequently, the MC for producing one more unit is this difference divided by the change in output, which is 70 / 10 = 7.

Thus, the correct calculation of MC when production increases from 100 to 110 units is 7, not 60.