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Understanding Marginal Costs
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A company is considering increasing production of its product by one unit. Which of the following scenarios best illustrates the concept of marginal costs and why it matters for production decisions?

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Choose the Best Answer

A

The cost of producing one additional unit is $5, which includes changes in material prices but not labor costs, indicating a fixed cost structure.

B

The cost of producing one additional unit is $10, due to increased wages for workers specifically hired for this task, highlighting the impact of variable costs.

C

The total cost of production remains the same as the company increases output, suggesting that fixed costs are influencing the decision.

D

The company incurs an additional cost of $15 for producing one more unit, but this includes previously incurred fixed costs, making it difficult to determine true marginal cost.

Understanding the Answer

Let's break down why this is correct

Answer

Marginal cost refers to the additional cost a company incurs when it produces one more unit of a product. For example, if a factory currently makes 100 toys and decides to increase production to 101 toys, the marginal cost would be the extra expenses involved in making that one additional toy, like materials and labor. Understanding marginal costs is important because it helps companies determine if producing more units is profitable. If the selling price of the additional toy is higher than the marginal cost of making it, then it makes sense to produce more. However, if the marginal cost is higher than the selling price, the company may lose money by increasing production.

Detailed Explanation

This option shows that the cost of making one more unit is $10. Other options are incorrect because This option suggests the cost is $5 but ignores labor costs; Here, the total cost doesn't change, which means fixed costs are dominating.

Key Concepts

Marginal Costs
Variable Costs
Fixed Costs
Topic

Understanding Marginal Costs

Difficulty

medium level question

Cognitive Level

understand

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