What is the difference between marginal cost and marginal revenue?
A. Marginal cost is the money earned from selling one more unit of a good. Marginal revenue is the money paid for producing one more unit of a good.
B. Marginal cost is the money paid for producing one more unit of a good. Marginal revenue is the money earned from selling one more unit of a good.
C. Marginal cost is the money a producer might make from one more unit. Marginal revenue is the money a producer actually makes from one more unit.
D. Marginal cost is the money a producer actually makes from one more unit. Marginal revenue is the money a producer might make from one more unit.
Answer (1)
Marginal cost is the expense of producing one more unit.
Marginal revenue is the income from selling one more unit.
Businesses compare marginal cost and marginal revenue to optimize production.
The correct answer is: Marginal cost is the money paid for producing one more unit of a good. Marginal revenue is the money earned from selling one more unit of a good.
Explanation
Understanding the Concepts Marginal cost and marginal revenue are fundamental concepts in economics that help businesses make informed decisions about production and pricing. Let's break down each term to understand the difference.
Marginal Cost Marginal cost is the additional cost incurred by producing one more unit of a good or service. It includes the cost of direct materials, direct labor, and variable overhead. Fixed costs are not included in the calculation of marginal cost because they do not change with the level of production.
Marginal Revenue Marginal revenue, on the other hand, is the additional revenue gained from selling one more unit of a good or service. It is calculated as the change in total revenue divided by the change in quantity. In a perfectly competitive market, marginal revenue is equal to the market price.
The Difference The key difference between marginal cost and marginal revenue is that marginal cost represents an expense, while marginal revenue represents income. Businesses use these concepts to determine the optimal level of production. They aim to produce up to the point where marginal revenue equals marginal cost, as this maximizes profit.
Final Answer Therefore, the correct answer is:
Marginal cost is the money paid for producing one more unit of a good. Marginal revenue is the money earned from selling one more unit of a good.
Examples
Imagine you're running a bakery. Calculating marginal cost helps you determine the cost of making one additional cake, including ingredients and labor. Marginal revenue helps you determine the income from selling that additional cake. By comparing these, you can decide if making more cakes will increase your overall profit. This concept extends beyond bakeries to all sorts of businesses, from tech companies deciding whether to produce more smartphones to farmers deciding whether to plant more crops.
