Principles of Microeconomics / Unit 6 MIC 0517 worked example, 60 to 90 seconds
Computing Marginal Cost from Variable Cost
The idea
Marginal cost between two rows of a cost table is the change in variable cost divided by the change in output. Use variable cost, not total cost, so that fixed cost never enters; the two give the same answer between any two rows, but only variable cost gives the right answer for the first units, where total cost includes the fixed cost that was already owed. Compute each step, and write the result between the rows it connects.
In practice
Worked example: the bakery's variable cost rises by sixty dollars for each worker while output rises by twenty, thirty, twenty, ten and five loaves. Marginal cost per loaf is therefore sixty over twenty, three dollars; sixty over thirty, two dollars; sixty over twenty, three; sixty over ten, six; sixty over five, twelve. From zero to twenty loaves the marginal cost is three dollars a loaf, not eight, because the hundred dollars of fixed cost would have been paid with no loaves at all.
Where people slip
The first-row trap: dividing total cost by output for the first units charges the fixed cost to them and reports a marginal cost that is really an average. The second trap is dividing by the number of workers instead of the change in loaves; marginal cost is per unit of output, which is why it varies while the wage does not.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Something wrong in this lesson? Flag it