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 essential idea is how a firm decides whether to produce another unit by weighing the extra cost against the extra revenue it would bring. Marginal cost is the cost of producing one more unit. Marginal revenue is the revenue gained from selling one more unit. The expansion rule is to keep producing more as long as the extra revenue from one more unit exceeds its extra cost, and to stop when they are equal, since that point optimizes profit.

This statement—marginal cost is the cost of producing one more unit—best describes the key factor that drives the expansion decision because it defines the unit-by-unit cost used to compare with marginal revenue. When you know the cost of producing that next unit, you can judge whether adding that unit will increase profit (if MR > MC) or not (if MR < MC), with the profit-maximizing point reached when MR = MC.