Microeconomics

Second Edition, Global Edition

Chapter 3
Optimization:
Doing the
Best You Can

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Learning Objectives

3.1 Optimization: Choosing the Best Feasible Option

3.2 Optimization Application: Renting the Optimal

Apartment

3.3 Optimization Using Marginal Analysis

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Key Ideas (1 of 3)

1. When an economic agent chooses the best

feasible option, she is optimizing.

2. Optimization using total value calculates the

total value of each feasible option and then

picks the option with the highest total value.

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Key Ideas (2 of 3)

3. Optimization using marginal analysis calculates

the change in total value when a person

switches from one feasible option to another,

and then uses these marginal comparisons to

choose the option with the highest total value.

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Key Ideas (3 of 3)

4. Optimization using total value and optimization

using marginal analysis give identical answers.

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Evidence-Based Economics
How does location affect the rental cost of
housing?

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Optimization: Choosing the Best Feasible
Option (1 of 4)

Do you always make the best choice?

Why not?

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Optimization: Choosing the Best Feasible
Option (2 of 4)

Sometimes it is difficult to make choices because

• You have limited information

• Sorting through information can be complicated

• You are inexperienced in dealing with a given

situation

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Optimization: Choosing the Best Feasible
Option (3 of 4)

Optimization can be implemented using many

different techniques.

We explore how to optimize using two techniques,

which yield identical answers.

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Optimization: Choosing the Best Feasible
Option (4 of 4)
Two Optimization Techniques

1. Total Value

total benefit – total cost (net benefit)

OR

2. Marginal Analysis
the change in the net benefit of one option
compared to another
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Optimization Application: Renting the
Optimal Apartment (1 of 12)
Exhibit 3.1 Apartments on Your Short List, Which Differ
Only on Commuting Time and Rent and Are Otherwise
Identical

Trade-off: Cost vs. Distance

Decision-making using
totals:
Where should I live?

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Optimization Application: Renting the
Optimal Apartment (2 of 12)

Optimization using total value

1. Translate all costs and benefits into common

units, like dollars per month.

2. Calculate the total net benefit of each

alternative.

3. Pick the alternative with the highest net benefit

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Optimization Application: Renting the
Optimal Apartment (3 of 12)
Exhibit 3.1 Apartments on Your Short List, Which Differ Only
with Regard to Commuting Time and Rent and Are
Otherwise Identical
Apartment Options

Apartment Commuting Rent

Time ($/month)
(hours/month)
Very Close 5 hours $1,180
Close 10 hours $1,090
Far 15 hours $1,030
Very Far 20 hours $1,000
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Optimization Application: Renting the
Optimal Apartment (4 of 12)
What does it cost to commute?
•
Availability of public transportation
•
Gasoline
•
Parking
•
Wear and tear on car
•
Opportunity cost of time

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Optimization Application: Renting the
Optimal Apartment (5 of 12)
Exhibit 3.2 Commuting Cost and Rental Cost Expressed
in Common Units, Assuming an Opportunity Cost of Time
of $10/hour
Apartment Options
Apartment Commuting Commuting Rent Total Cost: Rent
Time Cost ($/month) + Commuting
(hours/month) ($/month) ($/month)
Very Close 5 hours $50 $1,180 $1,230
Close 10 hours $100 $1,090 $1,190
Far 15 hours $150 $1,030 $1,180
Very Far 20 hours $200 $1,000 $1,200

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Optimization Application: Renting the
Optimal Apartment (6 of 12)

If the round-trip commute takes 20 hours/month

(very far) and the opportunity cost of time is

$10/hour, then the dollar cost of that commute is

)() = ()

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Optimization Application: Renting the
Optimal Apartment (7 of 12)
Exhibit 3.3 Total Cost Including Both Rent and Commuting
Cost, Assuming an Opportunity Cost of Time of $10/hour

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Optimization Application: Renting the
Optimal Apartment (8 of 12)
Before and After Comparisons: What if the
opportunity cost of commuting changes?

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Optimization Application: Renting the
Optimal Apartment (9 of 12)
Exhibit 3.4 Commuting Cost and Rental Cost Expressed in
Common Units, Assuming an Opportunity Cost of Time of
$15/hour
Apartment Options
Apartme Commuting Commuti Rent Total Cost: Rent +
nt Time ng Cost ($/ Commuting
(hours/ ($/month) month) ($/month)
month)
Very 5 hours $75 $1,180 $1,255
Close
Close 10 hours $150 $1,090 $1,240
Far 15 hours $225 $1,030 $1,255
Very Far 20 hours $300 $1,000 $1,300

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Optimization Application: Renting the
Optimal Apartment (10 of 12)
Exhibit 3.6 Total Cost Curves with the Opportunity Cost
of Time Equal to $10/hour and $15/hour

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Optimization Application: Renting the
Optimal Apartment (11 of 12)
What’s Missing?

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Optimization Application: Renting the
Optimal Apartment (12 of 12)

What’s the net benefit of one more?

How many servings do you want?

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Optimization Using Marginal Analysis (1 of
6)

Marginal Analysis:
1. Translate all costs and benefits into common
units, like dollars per month.
2. Calculate the marginal consequences of moving
between alternatives.
3. Choose the best alternative with the property
that moving to it makes you better off and moving
away from it makes you worse off.

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Optimization Using Marginal Analysis (2 of
6)
Exhibit 3.7 Relationship Between Levels and Differences
(Margins), Assuming a $10/hour Opportunity Cost of Time
A Comparison of the Apartments:
Apartment Commuting Marginal Rental Marginal Total Cost Marginal
Cost Commuting Cost Rental Total Cost
Cost Cost
Very Close $50 $1,180 $1,230

$50 −$90 −$40

Close $100 $1,090 $1,190

$50 −$60 −$10

Far $150 $1,030 $1,180

$50 −$30 $20

Very Far $200 $1,000 $1,200

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Optimization Using Marginal Analysis (3 of
6)

A Comparison of the Apartments:

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Optimization Using Marginal Analysis (4 of
6)

Principle of Optimization at the Margin

If an option is the best
choice, you will be made
better off as you move
toward it, and worse off as
you move away from it.

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Optimization Using Marginal Analysis (5 of
6)

Exhibit 3.8 Total Cost of Each Apartment and the Marginal

Cost of Moving Between Apartments, Assuming an
Opportunity Cost of $10/hour

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Optimization Using Marginal Analysis (6 of
6)

Exhibit 3.8 Total Cost of Each Apartment and the Marginal

Cost of Moving Between Apartments, Assuming an
Opportunity Cost of $10/hour

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Evidence-Based Economics (2 of 3)
How does location affect the rental cost of
housing?

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Evidence-Based Economics (3 of 3)
Exhibit 3.9 Apartment Rent in Portland, Oregon, Depends
on Distance from the City Center

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