State the relation between total cost and marginal cost.
The marginal revenue (MR) of a firm is defined as the increase in total revenue for a unit increase in the firm’s output. While, Total Cost refers to the total cost of production that is incurred by a firm in the short run to carry out the production of goods and services. It is the aggregate of expenditure incurred on fixed factors as well as variable factors. Total cost can be derived by summing up Marginal cost at all the levels of output.
The main points of relationship between TC and MC are:
1. Marginal cost is the addition to total cost, when one more unit of output is produced. MC is calculated as: MCn = TCn – TCn-1
2. When TC rises at a diminishing rate, MC declines.
3. When the rate of increase in TC stops diminishing, MC is at its minimum point.
4. When the rate of increase in total cost starts rising, the marginal cost is increasing.
A consumer buys 18 units of a good at a price of Rs. 9 per unit. The price elasticity of demand for the good is (−) 1. How many units the consumer will buy at a price of Rs. 10 per unit? Calculate.
Unemployment is reduced due to the measures taken by the government. State its economic value in the context of production possibilities frontier.
