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

• A. Marginal cost is the difference between fixed cost and variable cost; it shows how costs change with output.
• B. 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.
• C. Marginal cost is the decrease in total cost when production is reduced by one unit; it is found by subtracting variable cost from total cost.
• D. Marginal cost is the total cost divided by the total quantity produced; it measures the average cost per unit.

Answer: (B)

Verified step by step guidance

1. Understand that marginal cost (MC) represents the additional cost incurred when producing one more unit of output.
2. Recognize that total cost (TC) includes both fixed costs (which do not change with output) and variable costs (which do change with output).
3. To calculate marginal cost, focus on how total cost changes as output changes, specifically the change in total cost when output increases by one unit.
4. Use the formula for marginal cost: \(\text{MC} = \frac{\Delta \text{TC}}{\Delta Q}\), where \(\Delta \text{TC}\) is the change in total cost and \(\Delta Q\) is the change in quantity produced.
5. Interpret this formula as the cost of producing one additional unit, which helps firms decide how much to produce to maximize profit.