Directions: Answer the questions based on the following information:
ABC Ltd. Produces widgets for which the demand is unlimited and they can sell all of their production. The graph below describes the monthly variable costs incurred by the company as a function of the quantity produced. In addition, operating the plant for one shift results in a fixed monthly cost of Rs. 800. Fixed monthly costs for second shift operation are estimated at Rs. 1200. Each shift operation provides capacity for producing 30 widgets per month.

Note: Average unit cost, AC = Total monthly cost / monthly production, and Marginal cost, MC is the rate of change in total cost for unit change in quantity produced.

What is the correct answer?


ABC Ltd. is considering increasing the production level. What is the approximate marginal cost of increasing production from its July level of 40 units?

A. 110

B. 130

C. 150

D. 160

Correct Answer :

B. 130

At 40 units the Total cost (TC) = 2000 + 3500 = 5500
Marginal cost (MC) = Change in TC/Change in no of units
To find MC we will check at 2 places at production units of 46. The total cost = 2000 + 4300 = 6300.
At production units of 51, TC = 2000 + 5050 = 7050
MC from 40 to 46 = (6300 5500)/6 =133
MC from 40 to 51 = (7050 5500)/12 = 129
So we cant take the approximate value of MC = 130

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