Question

Explain the typical shapes of marginal benefit and marginal cost curves. How are these curves used to determine the optimal allocation of resources to a particular product? If current output is such that marginal cost exceeds marginal benefit, should more or fewer resources be allocated to this product? Explain.

Short answer

A typical marginal cost curve will be upward sloping, and a typical marginal cost curve will be downward sloping.

The optimal allocation is determined at the intersection point of both curves.

Fewer resources should be allocated to the product to reach the optimal allocation of resources. A decrease in the number of allocated resources would reduce the gap between the marginal cost and the marginal benefit.

Step-by-step solution

Shape of the marginal benefit and marginal cost curves

The law of increasing opportunity says that the marginal cost of producing an additional unit of a particular good will increase if more quantity is produced. It concludes that the increase in the production quantity will increase the marginal cost of each additional unit. Thus, the marginal cost curve would be an upward sloping curve.

On the other hand, the marginal benefit from an extra unit declines with an increase in the number of goods produced.Therefore, the curve of marginal benefit would be downward sloping.

Determination of the optimal allocation of resources

An increase in the production quantity of the goods will require more quantity of resources. The marginal cost increases, but the marginal benefit decreases with an increase in the production quantity of a particular good.

The optimal position of the produced quantity is the point when the marginal benefit equals the marginal cost.Hence, the intersection point of both curves will determine the optimal allocation of resources.

Allocation of resources to reach the optimal position

With an exceeding marginal cost, the marginal benefit would decrease the profit on each additional unit. It would cause the producer to decrease the quantity of production. Thus, fewer resources will be allocated for the production process.