Suppose Nicholas owns a business making Christmas tree ornaments. Currently, he makes 300 ornaments a month. At this level of production, each additional ornament takes him 30 minutes to make and costs him $5 in materials. Nicholas makes his ornaments in a small studio that he rents for $300 a month. Nicholas can easily increase or decrease the amount of time he spends making ornaments, and he can easily go to the store to buy additional materials to make the ornaments, but he has a year-long lease on his studio, so he has to pay his monthly rent no matter how many ornaments he produces each month. Nicholas values his time at $10 per hour. Other than his time, the cost of the materials and the rent on his studio, Nicholas has no additional production costs. a At Nicholas's current level of production, what is the marginal cost of making an additional ornament each month?

Explanation:

a. Marginal Cost (MC) = Cost of raw material + Cost of time

Each additional ornament cost him 30 minutes to make and he value his time at $10 per hour. So for 30 minutes value would be $5.

Materials cost him $5

MC = $5 + ($10/2)

MC = $10

it costs him $10 to make an additional ornament each month.

Explanation:

Marginal cost (MC) of production measures the cost of producing one extra unit of a good (Hall, 2019). If Nicholas produces one additional ornament, his marginal cost of production will be calculated as follows:

MC = change in cost / change in quantity

       = ($5 for materials + $5 for labour per half hour) / 301 – 300  units

       = $10 / 1

       = $10

or MC = ($10 for material + $10 for labour for a full hour) / 302 units - 300

          = $20 / 2

          = $10

It costs $10 extra to make an additional ornament in half an hour or 2 in a full hour. The fixed cost of $300 for rent, he has to pay regardless of the amount he produces. MC curve tends to fall first and then rises after diminishing marginal returns occur.  

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