Question

Relationship between marginal product (MP) and corresponding marginal cost (MC) is relevant when

• A. MP is at the maximum and MC is at the lowest point
• B. MP is increasing and MC is also increasing
• C. MP is decreasing and MC is also decreasing
• D. MP is increasing and the MC becomes negative

Hint:

Remember the inverse rule:
- Maximum Marginal Product (MP) corresponds to Minimum Marginal Cost (MC).
- Maximum Average Product (AP) corresponds to Minimum Average Variable Cost (AVC).

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
In production economics, there is an inverse relationship between physical production curves (Marginal Product) and monetary cost curves (Marginal Cost).
Key Formula or Approach:
The mathematical relationship between Marginal Cost (MC) and Marginal Product (MP) is expressed as:
\[ \text{MC} = \frac{P_x}{\text{MP}} \]
Where \(P_x\) represents the constant unit price of the variable input (such as feed or labor).

Step 2: Detailed Explanation:
Let us analyze how changes in Marginal Product affect Marginal Cost based on the formula:
- Phase 1: Increasing Returns.
At low levels of input use, the Marginal Product (MP) is increasing.
Because MP is in the denominator, an increasing MP causes the Marginal Cost (MC) to decrease:
\[ \text{As MP increases, MC decreases.} \]
- Phase 2: Maximum Efficiency.
When the variable input is used with optimal efficiency, the Marginal Product (MP) reaches its maximum value.
At this exact point, because the denominator is at its maximum, the Marginal Cost (MC) reaches its minimum value.
- Phase 3: Diminishing Returns.
Beyond this peak, due to the law of diminishing marginal returns, the Marginal Product (MP) begins to decrease.
This decrease in MP causes the Marginal Cost (MC) per unit of output to rise:
\[ \text{As MP decreases, MC increases.} \]
Therefore, the relationship between physical productivity and cost shows that when MP is at its maximum, MC is at its minimum (lowest point).

Step 3: Final Answer:
The correct relationship is that MP is at the maximum when MC is at its lowest point.