Suppose the fixed cost of building a nuclear power plant is $1 billion. Suppose also that the only variable cost is the labor of Homer Simpson, and he earns $10 per hour. If the plant generates 1,000 kilowatts each hour, and has already generated 1 billion kilowatts, what can you say about the marginal cost of the next kilowatt?
A) The marginal cost is falling.
B) The marginal cost is equal to $.01.
C) The marginal cost is equal to $1.01.
D) The marginal cost is rising.

Question

Quizplus · Accepted Answer

The marginal cost refers to the cost of producing one additional unit of a good. In this scenario, the fixed cost of $1 billion for building the plant does not affect the marginal cost of producing additional kilowatts, as it remains constant regardless of the output level. The only variable cost mentioned is the labor of Homer Simpson at $10 per hour. Since the plant generates 1,000 kilowatts each hour, the cost of labor per kilowatt is $10/1,000 = $0.01, making the marginal cost of the next kilowatt $0.01.

Suppose the Fixed Cost of Building a Nuclear Power Plant