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?

Question

Quizplus · Accepted Answer

The marginal cost of the next kilowatt is the additional cost of producing one more kilowatt. Since the fixed cost is already incurred, only the variable cost matters. Homer earns $10 per hour, and the plant generates 1,000 kilowatts per hour, so the marginal cost per kilowatt is $10/1,000 = $0.01.

Suppose the Fixed Cost of Building a Nuclear Power Plant