Variable cost divided by the change in quantity produced is
a. average variable cost.
b. marginal cost.
c. average total cost.
d. None of the above is correct.
The correct answer and explanation is :
The correct answer is:
b. Marginal cost.
Explanation:
Marginal cost (MC) is defined as the change in total cost that arises from producing one additional unit of output. It is calculated using the formula:
[
MC = \frac{\Delta TC}{\Delta Q}
]
Where:
- ( \Delta TC ) is the change in total cost
- ( \Delta Q ) is the change in quantity produced
However, in many cases, if fixed costs remain constant, the change in total cost is primarily due to variable costs. Thus, marginal cost can also be expressed as:
[
MC = \frac{\Delta VC}{\Delta Q}
]
Where:
- ( \Delta VC ) is the change in variable cost
This confirms that dividing the change in variable cost by the change in quantity produced gives us the marginal cost, making option b the correct answer.
Why Other Options Are Incorrect:
- (a) Average Variable Cost (AVC):
- AVC is the variable cost per unit of output. It is calculated as:
[
AVC = \frac{VC}{Q}
] - This measures the average cost of producing each unit, not the cost of producing one additional unit.
- (c) Average Total Cost (ATC):
- ATC includes both fixed and variable costs, calculated as:
[
ATC = \frac{TC}{Q}
] - Again, this is an average measure, not a marginal one.
- (d) None of the above:
- This is incorrect because marginal cost is the correct choice.
Marginal cost is crucial in economics because firms use it to determine the optimal level of production. If marginal cost is lower than the price, increasing production can be profitable. Conversely, if marginal cost exceeds price, reducing production may be optimal.