Question

For each of the following situations involving marginal cost (MC) and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units. LO1.4 a. 3,000 units at which \(\mathrm{MC}= 10\)dollar and \(\mathrm{MB}= 13\)dollar b. 11 units at which \(\mathrm{MC}= 4\)dollar and \(\mathrm{MB}= 3\)dollar c. 43,277 units at which \(\mathrm{MC}= 99\)dollar and \(\mathrm{MB}= 99\)dollar d. 82 units at which \(\mathrm{MC}<\mathrm{MB}\). e. 5 units at which \(\mathrm{MB}<\mathrm{MC}\).

Short answer

a: Produce more; b: Produce fewer; c: Keep current; d: Produce more; e: Produce fewer.

Step-by-step solution

Understanding Marginal Costs and Benefits

Marginal cost (MC) is the cost of producing one additional unit, while marginal benefit (MB) is the benefit or satisfaction from consuming one additional unit. The optimal decision involves equating MC and MB to maximize efficiency.

Situation Analysis for Part A

For 3,000 units, MC is 10 dollars and MB is 13 dollars. Since MB > MC, producing more units will increase total benefit as each additional unit provides more benefit than its cost.

Situation Analysis for Part B

For 11 units, MC is 4 dollars and MB is 3 dollars. Since MB < MC, it is better to produce fewer units because producing additional units costs more than the benefit they provide.

Situation Analysis for Part C

For 43,277 units, MC equals MB at 99 dollars. Since MB = MC, the current number of units is optimal, and production should not change.

Situation Analysis for Part D

The information given is that MC < MB for 82 units. Since MB exceeds MC, producing more units would likely increase the overall benefit, so it would be best to produce more units.

Situation Analysis for Part E

For 5 units, MB < MC. This implies that the cost of producing additional units is greater than the benefit gained, so the optimal decision is to reduce production.

Key concepts

Understanding Marginal Cost

Marginal Cost (MC) is a fundamental concept in economics that refers to the cost of producing one additional unit of a good or service. Understanding MC helps businesses and individuals make informed production decisions. Imagine you are running a lemonade stand. You already sold 10 lemonades, and you're considering making one more. If it costs you $1 for ingredients to make an extra cup, then $1 is your marginal cost for the eleventh lemonade.

MC is crucial because it helps businesses determine the point at which producing more is no longer profitable. As production increases, MC can change due to factors like:

• Economies of scale: If producing more units decreases the average cost, the MC might decrease.
• Input costs: An increase in the cost of materials can increase MC.
• Production limits: Once the capacity is reached, MC might rise.

By assessing MC, businesses can decide whether scaling up production will lead to increased profits or not.

Exploring Marginal Benefit

Marginal Benefit (MB) is the additional satisfaction or value a consumer receives from consuming one more unit of a good or service. It is a key concept when examining consumer decisions and their willingness to pay for additional units in the market.

For instance, if consuming the 20th chocolate bar gives you as much pleasure as the previous ones, the MB remains high, but if you start enjoying each subsequent chocolate less, the MB starts to decline. This is known as diminishing marginal utility, a common principle in economics.

Understanding MB is significant for businesses, as it dictates how many units can be sold at a given price, guiding pricing strategies. When MB exceeds MC, the additional production of units is beneficial since consumers value additional quantities more than it costs to produce them, potentially leading to higher revenues.

• Evaluating MB allows for better predictions of consumer purchasing behavior.
• Helps determine optimal pricing to maximize profit.

Decision Making in Economics: Balancing MC and MB

Economic decision making often involves balancing Marginal Cost (MC) against Marginal Benefit (MB). The optimal decision occurs when MB equals MC, as this point maximizes economic efficiency and profit.

Consider a scenario where a company is debating whether to produce additional units of a product. If the MB exceeds the MC, it's advantageous to increase production because the benefits outweigh the incremental costs. Conversely, if the MC is higher than the MB, reducing production is optimal as it currently costs more to make the product than the value gained from selling it.

At the equilibrium point where MC equals MB, production and consumption are optimized, meaning the allocation of resources yields the highest possible benefit for the costs incurred. Key implications of this analysis include:

• Proper resource allocation ensures no wastage and maximizes utility.
• Businesses can maintain competitive pricing while maximizing profit.
• Economies as a whole become more efficient when resources are directed where they are most valued.

Thus, understanding and applying MC and MB helps businesses and economies optimize operations and decision-making.