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Chapter 1: Q5 (page 17)

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.

a. 3,000 units at which MC = \(10 and MB = \)13.

b. 11 units at which MC = \(4 and MB = \)3.

c. 43,277 units at which MC = \(99 and MB = \)99.

d. 82 units at which MC < MB.

e. 5 units at which MB < MC.

Short Answer

Expert verified
  1. Produce more units
  2. Produce fewer units
  3. Produce the current number of units
  4. Produce more units
  5. Produce fewer units

Step by step solution

01

Analysis of marginal benefit and marginal cost

Marginal benefit and marginal cost are compared to reach the optimal point of production. If the marginal benefit exceeds the marginal cost, the producer tends to increase the number of units produced. If the marginal cost exceeds the marginal benefit, the producer tends to decrease the number of units produced.

02

Explanation for part (a)

At 3,000 units, the value of the marginal cost (MC) is $10, and the value of the marginal benefit (MB) is $13. Here, the value of the MB is greater than the value of the MC. Hence, the producer should produce more units.

03

Explanation for part (b)

At 11 units, the value of the marginal cost (MC) is $4, and the value of the marginal benefit (MB) is $3. Here, the value of the MC is greater than the value of the MB. Thus, the producer should produce fewer units.

04

Explanation for part (c)

At 43,277 units, the value of the marginal cost (MC) is $99, and the value of the marginal benefit (MB) is $99. Here, the value of the MB is equal to the value of the MC. Hence, the producer should produce the current number of units.

05

Explanation for part (d)

At 82 units, the marginal cost (MC) is less than the marginal benefit (MB). As the marginal benefit is greater than the marginal cost, the producer should produce more units.

06

Explanation for part (e)

At 5 units, the marginal benefit (MB) is less than the marginal cost (MC). As the marginal cost is greater than the marginal benefit, the producer should produce fewer units.

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Most popular questions from this chapter

Because investment and capital goods are paid for with savings, higher savings rates reflect a decision to consume fewer goods in the present to invest in more goods for the future. Households in China save 40 percent of their annual incomes each year, whereas U.S. households save less than 5 percent. At the same time, production possibilities are growing at roughly 7 percent per year in China but only about 3.0 percent per year in the United States. Use graphical analysis of ‘present goods’ versus ‘future goods’ to explain the difference between China's growth rate and the U.S. growth rate.

Potatoes cost Janice \(1 per pound, and she has \)5.00 that she could possibly spend on potatoes or other items. If she feels that the first pound of potatoes is worth \(1.50, the second pound is worth \)1.14, the third pound is worth \(1.05, and all subsequent pounds are worth \)0.30 per pound, how many pounds of potatoes will she purchase? How many pounds will she purchase if she has only $2 to spend?

Match each term with the correct definition.

• Economics

• Opportunity cost

• Marginal analysis

• Utility

e. The next-best thing that must be forgone in order to produce one more unit of a given product

f. The pleasure, happiness, or satisfaction obtained from consuming a good or service

g. The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity

h. Making choices based on comparing marginal benefits with marginal costs

Referring to the table in problem 5, suppose improvement occurs in the technology of producing forklifts but not in the technology of producing automobiles. Draw the new production possibilities curve. Now, assume that a technological advance occurs in producing automobiles but not in producing forklifts. Draw the new production possibilities curve. Now, draw a production possibilities curve that reflects technological improvement in the production of both goods.

Production Alternatives

Type of Production

A

B

C

D

E

Automobiles

0

2

4

6

8

Forklifts

30

27

21

12

0

How does the slope of a budget line illustrate opportunity costs and trade-offs? How does a budget line illustrate scarcity and the effect of limited incomes?

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