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Chapter 7: Q32 (page 185)

How does Fixed Cost effect Marginal Cost ? Why is this relationship important ?

Short Answer

Expert verified

Fixed Cost doesn't effect Marginal Cost.

Step by step solution

01

TFC Definition 

Total Fixed Cost is the cost incurred on fixed factors of production. It stays same (constant) at all of levels of output.

02

MC Definition 

Marginal Cost is the additional cost incurred, when an additional unit of output is produced.

03

Relationship Explanation 

  • MC is the difference between TC at nth level of output and at (n-1) th level of output.
  • However, TC changes only due to change in Variable Costs and not Fixed Costs, as latter are constant.

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