When Is the Marginal Cost Horizontal? (2024)

FAQs

When Is the Marginal Cost Horizontal? ›

The marginal cost is horizontal when the cost of making the next unit is the same as the cost of making units prior to it.

Marginal cost = (Change in cost) / (Change in quantity)

The change in quantity is the increase or decrease in the volume of production. There will be a difference in cost with an increase or decrease in production. This concludes the article on the marginal cost formula, which plays an important role in production.

According to economic theory, a firm should expand production until the point where marginal cost is equal to marginal revenue. Beyond this point, it would incrementally cost more to make a good than then incremental revenue the company would receive.

If the marginal cost is lower than the price you can sell the additional product for, it may make sense to increase the level of output. But if the marginal cost is higher, it might be better to maintain or decrease the quantity of output. You can also consider raising your prices if you plan to increase production.

Second Degree Price Discrimination

The product can be provided at a constant marginal cost until a rigid fixed capacity is reached; this means that the marginal cost curve will be horizontal up to the point where full capacity is reached where it becomes vertical.

The marginal cost refers to the increase in production costs generated by the production of additional product units. It is also known as the marginal cost of production. Calculating the marginal cost allows companies to see how volume output influences cost and hence, ultimately, profits.

The Importance of Marginal Cost

Marginal cost is the added cost to produce an additional good. For example, say that to make 100 car tires, it costs $100. To make one more tire would cost $80. This is then the marginal cost: how much it costs to create one additional unit of a good or service.

The marginal revenue is the additional revenue added by increasing the quantity. This is also known as the additional revenue “at the margin.” Therefore, profit is maximized when marginal cost equals marginal revenue which is the same as saying when marginal profit equals zero.

Answer and Explanation: Marginal revenue is not always equal to the marginal cost.

Explanation: Firms maximize their profits at the point where their marginal revenue is equal to the marginal cost M R = M C . When M R > M C , the firm is producing too little and it can earn more profits by increasing its production until the marginal revenue is equated to the marginal cost.

Is high marginal cost good or bad? ›

When marginal cost exceeds marginal revenue, it is no longer financially profitable for a company to make that additional unit as the cost for that single quantity exceeds the revenue it will collect from it. Using this information, a company can decide whether it is worth investing in additional capital assets.

The Relationship between Marginal Cost and Revenue

If the marginal cost is lower than the marginal revenue, it indicates that producing or selling additional units will contribute positively to overall profit. This means that the revenue generated from selling the extra unit exceeds the cost incurred to produce it.

If marginal cost is increasing, average costs are rising. As the cost of the next item produced rises, the average cost of all the items produced must also be rising. The average cost is the average of the total costs. It is the ratio of total costs and the number of goods produced.

Simply put, marginal cost is the cost of producing one additional unit of your product. And depending on where you are on the cost curve, the marginal cost can be falling, rising, or horizontal.

The marginal cost is horizontal when the cost of making the next unit is the same as the cost of making units prior to it.

The marginal cost curve is a horizontal line starting from the x-axis at a price (P subscript c) that is less than the y-intercept of the demand curve. The marginal cost curve is labeled MC=AC; that is, there are no fixed costs, so marginal cost equals average cost.

To determine the gross profit margin, we need to divide the gross profit by the total revenue for the year and then multiply by 100. To determine the net profit margin, we need to divide the net income (or net profit) by the total revenue for the year and then multiply by 100.