If total costs rise from £400 to £421 and the average cost falls from £40 to £38, what is the marginal cost?

Question

BlackTom AI · Accepted Answer

Let's lay out the problem step by step and check each option carefully.
First, note the given: total cost rises from £400 to £421, so the change in total cost ΔTC = 421 − 400 = £21.
We are told the average cost falls from £40 to £38. To relate average cost (AC) and total cost (TC) to output (Q), use AC = TC / Q. Initially, AC = £40 and TC = £400, so the initial output is Q1 = TC / AC = 400 / 40 = 10 units. After the change, AC = £38 and TC = £421, so the new output is Q2 = 421 / 38 ≈ 11.07 units. Although the exact output isn’t a neat integer, marginal cost is defined as the change in total cost when output increases by one unit (MC ≈ ΔTC / ΔQ).
From Q1 to Q2, output increased by roughly 1 unit (10 to about 11). The total cost increased by £21, so the marginal cost per extra unit is MC ≈ £21 / 1 ≈ £21. This aligns with the standard interpretation that MC equals the additional cost incurred by producing one more unit.
Now, evaluate the options:
- Option A: £-2. A negative marginal cost would imply that producing an extra unit reduces total cost, which contradicts the observed increase in total cost from £400 to £421. Therefore this is incorrect.
- Option B: £2. A marginal cost of £2 would correspond to a much smaller increase in total cost than the actual £21 observed for the extra unit, so this is not consistent with the data given. Hence incorrect.
- Option C: £21. This matches the calculated change in total cost associated with producing the additional unit (approximately one more unit of output), so this is correct.
- Option D: £38. This value corresponds to the new average cost, not the marginal cost, and would be inappropriate as a marginal cost figure in this context. Therefore incorrect.
In summary, the only option that coherently explains the observed cost increase per additional unit of output is £21, while the others conflict with the definitions or the numerical changes provided.

Practice for Assessment 2 - No 4

If total costs rise from £400 to £421 and the average cost falls from £40 to £38, what is the marginal cost?

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Practice for Assessment 2 - No 4

If total costs rise from £400 to £421 and the average cost falls from £40 to £38, what is the marginal cost?

View Explanation

Log in for full answers

Similar Questions

An assumption of the BECOMP model is:

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Refer to the accompanying graph to answer the next question. The firm is experiencing gains from specialization up to what level of output along the marginal cost curve?

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A company produces a popular brand of cookies. In the short run, the size of its factory and equipment are fixed, but it can hire more or fewer workers. Suppose the company observes that its marginal product of labor is increasing. What will happen to its marginal cost of production?

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