Question

For each of the following situations involving marginal cost (MC) and marginal bencfit (MB), indicate whether it would be best to produce more, fewer, or the current number of units. a. 3,000 units at which \(\mathrm{MC}=\mathrm{S} 10\) and \(\mathrm{MB}=\mathrm{S} 13\) b. 11 units at which \(M C=S 4\) and \(M B=S 3\) c. 43,277 units at which \(\mathrm{MC}=\$ 99\) and \(\mathrm{MB}=\$ 99\) d. 82 units at which \(M C

Short answer

a: produce more, b: produce fewer, c: maintain, d: produce more, e: produce fewer.

Step-by-step solution

Understanding Marginal Cost and Marginal Benefit

Marginal cost (MC) represents the cost of producing one additional unit, while marginal benefit (MB) is the benefit received from producing that additional unit. To maximize net benefits, produce where MC equals MB; produce more if MB > MC; produce fewer if MB < MC.

Situation a: Evaluating 3,000 Units

For 3,000 units, MC is $10 and MB is $13. Since MB > MC, producing more units will increase total benefit relative to total cost.

Situation b: Evaluating 11 Units

For 11 units, MC is $4 and MB is $3. Since MB < MC, producing fewer units will reduce costs more than benefits are reduced, improving net benefits.

Situation c: Evaluating 43,277 Units

For 43,277 units, both MC and MB are $99. Since MC = MB, the current production level is optimal, and no adjustment is needed.

Situation d: Evaluating 82 Units

For 82 units, MC < MB. This indicates that the marginal benefit of additional production exceeds the cost. Therefore, producing more units will increase net benefits.

Situation e: Evaluating 5 Units

For 5 units, MB < MC, indicating marginal costs of additional units are greater than the benefits. Thus, fewer units should be produced for optimal economic efficiency.

Key concepts

Understanding Marginal Cost

Marginal cost (MC) is the cost incurred from producing one more unit of a good or service. It's an important concept in economics because it helps businesses decide how much of a product to produce. If the MC is less than the selling price of that unit, the business could profit from producing it. However, as production increases, the MC can rise due to factors like resource limitations or increased complexity in production. Understanding MC is crucial because it helps in:

• Deciding production levels;
• Calculating profit margins; and
• Managing resource allocation efficiently.

By carefully analyzing changes in marginal cost, firms can find the point at which additional production might start leading to a decrease in profitability.

Exploring Marginal Benefit

Marginal benefit (MB) refers to the additional satisfaction or utility gained by consuming or producing one more unit of a good or service. Understanding MB is vital for determining whether an extra unit should be produced or consumed. Here’s why MB matters:

• It helps in setting pricing strategies.
• It plays a role in establishing consumer demand.
• It guides firms towards maximizing profits.

In an ideal scenario, firms strive to produce up to the point where MB equals marginal cost, ensuring they are not spending more on production than the additional benefit they receive.

Maximizing Net Benefits

Net benefits can be understood as the difference between total benefits and total costs. When deciding on production, the goal is to maximize these net benefits to ensure economic effectiveness. Here's how net benefits work:

• If MB > MC, increasing production can boost net benefits.
• If MB < MC, reducing production might enhance net benefits.
• If MB = MC, the production level is optimized for maximum net benefit.

Businesses look to operate where the net benefits are at their peak, which means resources are used in the most productive way possible.

Achieving Economic Efficiency

Economic efficiency occurs when resources are allocated in a way that maximizes the total benefit produced with the given resources. It's about getting the most value out of the resources without waste. Factors contributing to economic efficiency include:

• Producing the right amount of goods relative to consumer needs (allocative efficiency).
• Producing goods at the lowest possible cost (productive efficiency).

When MC equals MB, economic efficiency is reached, as the resources are perfectly allocated to produce the most balanced and beneficial outcome across the board.