Ralph wants to buy some milk and a box of cereal. If Ralph buys 4 gallons of milk at $3.00 per gallon, the box of cereal costs $2.00. If he buys 5 gallons of milk, the box of cereal is free. For Ralph, the marginal cost of buying a fifth gallon of milk is:
A) zero.
B) $1.00.
C) $2.00.
D) $3.00.

Question

Quizplus · Accepted Answer

If Ralph buys 4 gallons of milk, his total cost for milk is 4 x $3.00 = $12.00. He also buys a box of cereal for $2.00, making his total cost $14.00.

If Ralph buys 5 gallons of milk, his total cost for milk is 5 x $3.00 = $15.00. However, he gets the box of cereal for free, so his total cost is still $15.00.

The marginal cost is the cost of buying one additional unit. In this case, it would be the cost of buying the fifth gallon of milk.

If Ralph buys the fifth gallon of milk, his total cost is $15.00. But if he only bought 4 gallons of milk, his total cost would be $14.00. So the marginal cost of buying the fifth gallon of milk is $15.00 - $14.00 = $1.00.

Therefore, the best choice is B, with an explanation that the marginal cost of buying a fifth gallon of milk is $1.00.

Ralph Wants to Buy Some Milk and a Box of Cereal