Which of the following best describes marginal cost and how it is calculated?

• A. Marginal cost is the decrease in total cost when production is reduced by one unit; it is found by subtracting variable cost from fixed cost.
• B. Marginal cost is the sum of fixed and variable costs for all units produced; it is found by adding total fixed cost to total variable cost.
• C. Marginal cost is the total cost divided by the total quantity produced; it measures the average cost per unit.
• D. Marginal cost is the increase in total cost that results from producing one additional unit of output; it is found by dividing the change in total cost by the change in quantity produced.

Answer: (D)

Verified step by step guidance

1. Understand the concept of marginal cost: Marginal cost represents the additional cost incurred when producing one more unit of output. It reflects how total cost changes as production quantity changes by one unit.
2. Recall the formula for marginal cost, which is the change in total cost divided by the change in quantity produced. Mathematically, this is expressed as: \[\text{Marginal Cost} = \frac{\Delta \text{Total Cost}}{\Delta \text{Quantity}}\]
3. Recognize that total cost includes both fixed costs (which do not change with output) and variable costs (which do change with output). Since fixed costs remain constant, marginal cost is primarily influenced by changes in variable costs.
4. Avoid confusing marginal cost with average cost or total cost. Average cost is total cost divided by quantity, and total cost is the sum of fixed and variable costs for all units produced, but marginal cost specifically focuses on the cost of producing one additional unit.
5. Use the marginal cost formula to calculate the cost of producing one more unit by finding the difference in total cost when output increases by one unit, then dividing that difference by the change in quantity (which is typically 1 unit).