Marginal cost and marginal revenue are two critical concepts in economics, particularly in the context of production and profit maximization.
Marginal Cost (MC): This is defined as the additional cost incurred by producing one extra unit of a good or service. It represents the cost of expanding production by a small amount (one unit). When a firm produces goods, it incurs costs like labor, materials, and overhead. If the firm decides to produce one additional unit, there is usually an associated cost that comes with it—that's the marginal cost.
Marginal Revenue (MR): This is the additional revenue that a firm receives from selling one extra unit of a good or service. It represents the increase in total revenue that results from selling an additional unit. As a firm sells more goods, it generates more revenue, and the revenue associated with the sale of a single additional unit is the marginal revenue.
Now let's map these definitions to the options provided:
Option 1 suggests that marginal cost is associated with revenue from selling more goods, and marginal revenue is associated with the costs of producing more goods, which is incorrect.
Option 2 correctly states that the marginal cost is the money paid for producing one more unit of a good, while marginal revenue is the money earned from selling one more unit of a good. This correctly reflects the above definitions.
Option 3 and option 4 confuse the concepts with potential and actual earnings, which does not accurately describe marginal cost and marginal revenue.
Therefore, the correct answer is:
Marginal cost is the money paid for producing one more unit of a good. Marginal revenue is the money earned from selling one more unit of a good.
