A New House

A New House

Kim M. Brown

5/14/2010

XECO 212

Roger Pae

Increase or decrease in the total costs of a business firm as the result of one more or one less unit of output, also called incremental cost or differential cost. Determining marginal cost is important in deciding whether or not to vary a rate of production. In most manufacturing firms, marginal costs decrease as the volume of output increases due to economies of scale, which include factors such as bulk discounts on raw materials, specialization of labor, and more efficient use of machinery. At some point, however, diseconomies of scale enter in and marginal costs begin to rise; diseconomies include factors like more intense managerial supervision to control a larger work force, higher raw materials costs because local supplies have been exhausted, and generally less efficient input. The marginal cost curve is typically U-shaped on a graph.

A firm is operating at optimum output when marginal cost coincides with average total unit cost. Thus, at less than optimum output, an increase in the rate of production will result in a marginal unit cost lower than average total unit cost; production in excess of the optimum point will result in marginal cost higher than average total unit cost. In other words, a sale at a price higher than marginal unit cost will increase the net profit of the manufacturer even though the sales price does not cover average total unit cost; marginal cost is thus the lowest amount at which a sale can be made without adding to the producer's loss or subtracting from his profits.

It has been said that the removal of the mortgage interest rate deduction alone will lead to a decline in housing prices. The size of this decline depends on the homeowner's marginal tax bracket. It is easy to estimate the loss to homeowners that would result from a partial equilibrium change in the tax code. Suppose we look at an individual who has a 28 percent marginal income tax