Which statement best describes marginal cost, marginal revenue, and the production rule for expansion?

Which statement best describes marginal cost, marginal revenue, and the production rule for expansion?

• A. Marginal revenue is the revenue from selling one more unit.
• B. Marginal cost is the cost of producing one more unit.
• C. Marginal cost is the total cost of all units produced.
• D. Marginal revenue is the total revenue from all units sold.

Answer: (B)

The key idea is how marginal concepts guide expansion decisions: you compare the benefit of one more unit to the cost of producing that unit. Marginal cost is exactly the cost of producing one additional unit, which you get by looking at how total cost changes when output increases by one unit. This is the crucial piece you use with marginal revenue—the extra revenue from selling that one more unit—to decide whether to expand. If the extra revenue exceeds the extra cost, expanding adds profit; if it costs more than it earns, you don’t expand; profit typically peaks where marginal revenue equals marginal cost. So the statement that defines marginal cost as the cost of producing one more unit is the best fit because it provides the essential cost measure needed for the expansion rule. The other statements describe marginal revenue or total cost/revenue, which don’t define the key cost part of the decision.

The key idea is how marginal concepts guide expansion decisions: you compare the benefit of one more unit to the cost of producing that unit. Marginal cost is exactly the cost of producing one additional unit, which you get by looking at how total cost changes when output increases by one unit. This is the crucial piece you use with marginal revenue—the extra revenue from selling that one more unit—to decide whether to expand. If the extra revenue exceeds the extra cost, expanding adds profit; if it costs more than it earns, you don’t expand; profit typically peaks where marginal revenue equals marginal cost. So the statement that defines marginal cost as the cost of producing one more unit is the best fit because it provides the essential cost measure needed for the expansion rule. The other statements describe marginal revenue or total cost/revenue, which don’t define the key cost part of the decision.