4.

Use the graph below to answer the following questions

a) At 60 units of the activity, marginal benefit is $ 7 and marginal cost is $ 2 .

b) Adding the 60th unit of the activity causes net benefit to increase (increase, decrease) by
$ 5 .
c) At 220 units of the activity, marginal benefit is $ 3 and marginal cost is $ 8 .
d) Subtracting the 220th unit of the activity causes net benefit to increase (increase,
decrease) by $ 5 .
e) The optimal level of the activity is 140 units. At the optimal level of the activity,
marginal benefit is $ 5 and marginal cost is $ 5 .

6. Fill in the blanks in the following table to answer the questions below.

a. What is the optimal level of activity in the table above?

b. What is the value of net benefit at the optimal level of activity? Can net benefit be increased by
moving to any other level of A? Explain.

c. Using the numerical values in the table, comment on the statement, The optimal level of activity
occurs where marginal benefit is closest to marginal cost.

Answer:
a. A* =4

b. NB* =$73. Yes, by increasing A to 6 units of activity, total benefit will continue to increase. Although
A= 4 maximized net benefit, it does not generally maximize total benefit. Yes, by decreasing A to zero
units of activity, total cost can be decreased to zero. Minimizing total cost is clearly not optimal.

c. For unconstrained optimization problems with discrete activity levels, it may not be possible to adjust
A to precisely the level where MB=MC. However, adjusting A to the point where the difference between
MB and MC is minimized may, in some instances, fail to achieve the maximum net benefit. This problem
is one such example. At 5units of activity the difference between MB and MC is just $1 ($67$68). At
the optimal level, A = 4, the difference between MB and MC is $3 ($69 $66). The correct rule to follow
for discrete choice variables is to increase A until the last (or highest) level of activity is reached for
which MB is greater than MC.

7. Now suppose the decision maker in Technical Problem 6 faces a fixed cost of $24. Fill in the blanks in
the following table to answer the questions below. AC is the average cost per unit of activity.

a. How does adding $24 of fixed costs affect total cost? Net benefit?

b. How does adding $24 of fixed cost affect marginal cost?

c. Compared to A* in Technical Problem 6, does adding $24 of fixed cost change the optimal level of
activity? Why or why not?
d. What advice can you give decision makers about the role of fixed costs in finding A*?

e. What level of activity minimizes average cost per unit of activity? Is this level also the optimal level of
activity? Should it be? Explain.

f. Suppose a government agency requires payment of a one-time, nonrefundable license fee of $100 to
engage in activity A, and this license fee was paid last month. What kind of cost is this? How does this
cost affect the decision makers choice of activity level now? Explain.

Answer:

a) 10+22+14 = $46.
b) For the fourth unit of activity Y, each dollar spent increases total benefit by $10, and total benefit by
$10.
c) 2 units of X, 4 units of Y, and 3 units of Z will be the optimal level because the commutative
expenditure will be equal to $18. Whereas 2X, 2Y AND 4Z will give total expenditure of $18 but
marginal benefit will not be maximum.
d) 5 units of X, 5 units of Y and 6 units of Z will be the optimal level as marginal benefit will be
maximum and total expenditure will be $33.
 7 units of X, 5 units of Y and 6 units of Z will be the optimal level as marginal benefit will be
maximum and total expenditure will be $35.

Answer:

a. The budget constraint is as follows: 2X + 10Y =26 Thus, the equilibrium level of activity is 3 units
of X units of Y.
It satisfies both the conditions stated above:
MBx / Px = Mby / Py
MBx for 3 unit = $18, MBy for 2 unit = $90
18/2 = 90/10
And the budget constraint as follows:
2X+10Y = 262(3)+10(2) = 26
b. The total benefit associated with 3 units of X and 2 unit of Y is = 72 + 190 = 262
c. Do the similar calculations as in (a) and (b) if the budget constraint rises to $58.
Answer:

a. @ 0 guards 50 (200x0) + (25 x 50) = 1250

@ 1 Guard 30 (200 x 1) + (25 x 30) = 950
@ 2 Guards 20(200 x 2) + (25 x 20) = 900
@ 3 Guards 14(200 x 4) + (25 x 14) = 950
@ 4 Guards 8(200 x 4) + (25 x 8) = 1000
@ 5 Guards 6(200 x 5) + (25 x 6) = 1150

Therefore Twenty-first Century Electronics should hire two guards

b. Guard one = (50 30) x 25

Guard one = 20 x 25
Guard One = 500
The first security guard would be paid the maximum amount 500
c. MC = 200
Marginal Benefit (4) = (14-8) x 50
MB = 6 x 50
MB = 300
TB = (50-8) x 50 (4 x 200) = 1300
Therefore they should hire four guards @ $ 50 cost of stolen radio