Marginal cost is the cost of producing an additional unit. In higher education, one marginal cost would be cost of educating an additional student. Formula-based budget determination for public higher education is usually based on average cost per student. This study estimates marginal cost and compares it with average cost. There are several methods for estimating marginal costs; the regression method is the central focus of this paper. It involves using regression analysis to estimate the coefficients, or marginal effects, of various independent variables. Two regression equations were developed using 1982 and 1983 data from the University of Massachusetts, Amherst. In both equations, the marginal cost was below the average cost. Through the average cost per person is lower than the average cost per Full Time Equivalent (FTE), the marginal cost of instruction using headcount as a unit of measurement was noticeably higher than the marginal cost of educating an FTE. The results demonstrate that formula-driven budgets based on average cost ignore the existence of economies of scale. Marginal cost is a more accurate cost to use when measuring increases or decreases. (BW)