If a firm’s fixed cost remains constant, but its variable cost increases, what happens to the marginal cost? Select one:
A. Marginal cost becomes zero
B. Marginal cost remains the same
C. Marginal cost increases
D. Marginal cost decreases
The correct answer and explanation is:
Correct Answer: C. Marginal cost increases
Explanation (300 words):
Marginal cost (MC) refers to the additional cost incurred when producing one more unit of a good or service. It is calculated by the change in total cost divided by the change in quantity produced: Marginal Cost (MC)=ΔTotal CostΔQuantity\text{Marginal Cost (MC)} = \frac{\Delta \text{Total Cost}}{\Delta \text{Quantity}}
Total cost (TC) is the sum of fixed costs (FC) and variable costs (VC): TC=FC+VC\text{TC} = \text{FC} + \text{VC}
Fixed costs are those that do not change with the level of output (e.g., rent, salaries of permanent staff). In contrast, variable costs change with production levels (e.g., raw materials, wages of temporary workers).
If fixed costs remain constant, they do not influence the marginal cost directly. However, if variable costs increase, it means that the cost to produce each additional unit is now higher. This directly impacts the marginal cost, causing it to increase as well.
For example, suppose a company pays more for raw materials due to a shortage. Even though its rent (a fixed cost) hasn’t changed, the cost of producing each additional unit has increased because each unit now uses more expensive inputs. This rise in per-unit variable cost causes a rise in marginal cost.
In practical terms, increasing marginal cost is a common scenario in real-world production. This often happens due to diminishing marginal returns—where adding more of a variable input (like labor) to a fixed input (like machinery) results in less efficient production.
Summary:
- Fixed costs do not affect marginal cost directly.
- An increase in variable cost increases total cost per additional unit.
- Therefore, marginal cost increases when variable costs increase while fixed costs remain constant.