Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Marginal costs are always lower than variable costs
B
Marginal costs equal variable costs at the optimal output level
C
Marginal costs are irrelevant to variable costs
D
Marginal costs are higher than variable costs at all output levels
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive market, a firm aims to maximize its profit by producing the optimal amount of goods. Marginal cost is the additional cost of producing one more unit of a product, while variable costs are the costs that change with the level of output, like materials and labor. To find the optimal output level, a firm compares the marginal cost to the price it receives for each unit sold. If the marginal cost is less than the price, the firm should produce more to increase profits, but if the marginal cost exceeds the price, it should reduce production. For example, if producing one more toy costs $5 and the toy sells for $10, the firm should continue producing because it makes a profit on that additional toy.
Detailed Explanation
At the best output level, the cost of making one more item (marginal cost) matches the cost of the materials and labor used for each item (variable costs). Other options are incorrect because Some might think that marginal costs are always less than variable costs; It's a common mistake to think that marginal costs don't relate to variable costs at all.
Key Concepts
variable costs
perfect competition
Topic
Understanding Marginal Costs
Difficulty
medium level question
Cognitive Level
understand
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