Question

A hair stylist currently cuts and colors hair for 50 clients per week and earns a profit. He is considering expanding his operation in order to serve more clients. Should he expand

Answer 1

The decision to expand depends on the marginal cost of serving more clients and the marginal revenue he will earn from serving more clients.

What is marginal cost and marginal revenue?

Marginal revenue is the change in total revenue when output is increased by one unit. Marginal cost is the change in total cost when consumption is increased by one unit.  

Economic theory suggests that output should be increased if the marginal revenue exceeds the marginal cost. If marginal cost is greater than marginal revenue, the business should not be expanded. Profit is maximised when marginal revenue is equal to marginal cost.

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