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  • Marginal Benefit and Marginal Cost

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    Amina Akther Mim 1821179649
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    To maximize net benefits from an activity, one should find the level where marginal costs equal marginal benefits. This marginalist approach leads to a unique optimal solution, unlike simply requiring total benefits to exceed total costs which allows for multiple possible levels. The marginal costs equal to marginal benefits principle can be easily applied by increasing the activity if marginal benefits are greater than marginal costs, decreasing if marginal benefits are less than marginal costs, and stopping if they are equal.

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    To maximize net benefits from an activity, one should find the level where marginal costs equal marginal benefits. This marginalist approach leads to a unique optimal solution, unlike simply requiring total benefits to exceed total costs which allows for multiple possible levels. The marginal costs equal to marginal benefits principle can be easily applied by increasing the activity if marginal benefits are greater than marginal costs, decreasing if marginal benefits are less than marginal costs, and stopping if they are equal.

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    36 views4 pages

    Marginal Benefit and Marginal Cost

    Uploaded by

    Amina Akther Mim 1821179649
    To maximize net benefits from an activity, one should find the level where marginal costs equal marginal benefits. This marginalist approach leads to a unique optimal solution, unlike simply requiring total benefits to exceed total costs which allows for multiple possible levels. The marginal costs equal to marginal benefits principle can be easily applied by increasing the activity if marginal benefits are greater than marginal costs, decreasing if marginal benefits are less than marginal costs, and stopping if they are equal.

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    © All Rights Reserved
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    of 4

    Costs and Benefits

    The importance of marginalism


    Comparing costs and benefits

    • Net benefit = Total Benefits - Total Costs

    • To maximize NET benefits, find the level of an


    activity at which

    MARGINAL COSTS = MARGINAL BENEFITS


    (or as close to equality as the problem permits)
    MC = MB leads to UNIQUE solution
    • Marginal costs = marginal benefits will lead to the
    unique optimal decision.
    • Total Benefit > Total Cost will NOT lead to a unique
    solution. Since both benefits and costs will normally
    rise with the level of an activity, many possible levels
    have total benefits greater than total costs.
    • But since marginal costs normally rise and marginal
    benefits normal decline, there will be one level of an
    activity at which MC = MB.
    MC = MB is easy to apply
    • Marginal costs = marginal benefits can be applied
    more easily than any other rule.
    • Maximizing Total Benefit - Total Cost by exhaustive
    calculation requires knowing all the costs and benefits
    before taking any decision. Outside of textbooks, we
    rarely know this.
    • The equimarginal principle can be applied in stages: if
    MB > MC at a given level of activity, increase the
    activity; if MB < MC, decrease the activity; if MB = MC,
    stop.

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