A grape grower with a vineyard in the Edna Valley and in the Carneros appellation in Sonoma/Napa has a contract to produce 18 tons of pinot noir grapes for Gallo. The current allocation of the 18 tons results in a marginal cost of production in the Edna Valley vineyard of $800 (MCV = $800) and a marginal cost of production in the Carneros vineyard of $1200 (MCC = $1200). Explain whether the grower should move one ton of production from the Edna Valley to Carneros or vice versa. Make sure to provide a clear explanation of the outcome consistent with the idea of the equimarginal principle. Make sure to use the correct terms and units.
The cost that a firm incurs when it has to produce extra units of any goods or services is referred to as a marginal cost. It is calculated by keeping in mind the total cost of producing the additional goods and dividing that sum by the change in the total quantity of the produced goods. Variable expenses like materials and labour are included in marginal cost. Additionally, it takes into account any increases in fixed costs like selling, administration, and overhead.
Marginal cost = (Change in cost) / (Change in quantity)
When a change in the volume of production is required, the change in cost is referred to as the change in the cost of production. A change in the total cost of production results because of the requirement for extra labour and raw materials to produce additional units. It is the quantity of output that changes, either more or less. Depending on whether output rises or falls, there will be a difference in cost.
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