Question

A construction company has built 30 houses so far this year at a total cost to the company of $7.5 million. If the company builds a 31st house, its total cost will increase to $7.76 million. Which of the following statements is correct?
a. For the first 30 houses, the average cost per house was $250,000.
b. The marginal cost of the 31st house, if it is built, will be $260,000.
c. If the company can experience a marginal benefit of $275,000 by building the 31st house, then the company should build it.
d. All of the above are correct.

Answer 1

Answer:

d. All of the above are correct

Explanation:

a. is correct bescause if we calculate the average cost for the first houses we find this:

$\frac{7,500,000}{30}=250,000$

this agrees with the statement of option a.

b. The marginal cost is the variation in the total cost if an additional unit is produced.

The TC of producing 30 houses is 7,500,000 and the TC for 31 houses is 7,760,000

Now we just find the variation of producing that additional house by substracting the two costs

Cm= 7,760,000 - 7,500,000 = 260,000

c.

The marginal benefit is 275,000, the marginal cost is 260,000

The profit is then:

275,000 - 260,000 = 15,000

There is a profit of $15,000 product of building the 31st house

The three statements are correct so the answer is d.