Marginal Analysis: Marginal Cost v. Marginal Benefit
Marginal Analysis: Marginal Cost v. Marginal Benefit
Essential Skill:
Demonstrate understanding of concepts
“EITHER-OR” OR “HOW
MUCH”
The state government is considering whether to build a public library or a new elementary
school.
“Either-Or” Decision
Executives at Apple Computer are debating whether or not to produce an additional 300,000
IPhones this year
“How Much” Decision
You have been accepted into the Peace Corp and will be posted to the Czech Republic. You
must now decide whether to join the Peace Corp or to go to school full time at the University
of Florida
“Either-Or” Decision
You are deciding whether to cut back your 30-hour work week to 20 hours so that you can
take an evening class at your local college.
“How Much” Decision
The price of tuition at your community college has gone up. You’re considering taking less
credits.
“How Much” Decision
MARGIN
The margin is defined as “the next step”
It could be an incremental step (a little bit more) or a
detrimental step (a little bit less)
WITH
8
Solving the problem
Step 1: Determine what is the marginal benefit?
0 0 0
1 25 25
2 45 20
3 60 15
4 70 10
5 75 5
6 79 4
7 81 3
9 9
Step 2: What is the marginal cost?
The marginal cost is what Jerry has to pay to keep the store
open for each additional hour.
0 $0 0 0
1 25 25 10
2 45 20 10
3 60 15 10
4 70 10 10
5 75 5 10
6 79 4 10
7 81 3 10
10 10
Step 3: Compare the marginal benefit and the marginal
cost for each hour that the store is open to determine if
Jerry should keep
it open.
Hours Total Revenue Marginal
Benefit Marginal Net Marginal
Open (Total Benefit)
$ (∆ Total Benefit) Cost Benefit/Cost
$ $ $
0 $0 $0 0 0
1 25 25 10 25-10 = 15
2 45 20 10 20-10= 10
3 60 15 10 5
4 70 10 10 0
5 75 5 10 –5
6 79 4 10 –6
7 81 3 10 –7
11 11
The optimal number of hours is 4. For the 4th hour,
marginal benefit equals marginal cost.
0 0 0 0 0
1 25 25 10 25-10 = 15
2 45 20 10 20-10= 10
3 60 15 10 5
4 70 10 10 0
5 75 5 10 –5
6 79 4 10 –6
7 81 3 10 –7
12 12
CLEANING YOUR ROOM
Your room is dirty
Let’s clean it.
How clean?
What are the benefits of different degrees of clean?
What is the marginal opportunity cost?
HOW MUCH OF A
PARTICULAR
ACTIVITY?
Pursue activities as long as the marginal benefit
exceeds the marginal opportunity cost
Pursue activities up to the point where: MB = MOC
If the marginal benefit of another unit of the activity
is greater than the marginal opportunity cost, go for
it!
If the marginal benefit of another unit of the activity
is less than the marginal opportunity cost, stop!