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Importance of Marginal Analysis Explained

Marginal analysis is important for individuals, businesses, and governments to make decisions about additional actions and allocation of resources. It helps break down decisions into smaller pieces to optimize costs and benefits. For businesses and governments, marginal analysis weighs whether extra resources allocated to a program will generate benefits exceeding the costs. For the ice cream example, the marginal cost of each additional scoop is the increase in total cost. The marginal cost is $5 for the first scoop, $4 for the second, and $3 for the third. In the franchise example, the brothers should open the new franchise. While the initial cost is $10 million, the marginal benefit of $3 million profits per year for 5 years exceeds

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102 views3 pages

Importance of Marginal Analysis Explained

Marginal analysis is important for individuals, businesses, and governments to make decisions about additional actions and allocation of resources. It helps break down decisions into smaller pieces to optimize costs and benefits. For businesses and governments, marginal analysis weighs whether extra resources allocated to a program will generate benefits exceeding the costs. For the ice cream example, the marginal cost of each additional scoop is the increase in total cost. The marginal cost is $5 for the first scoop, $4 for the second, and $3 for the third. In the franchise example, the brothers should open the new franchise. While the initial cost is $10 million, the marginal benefit of $3 million profits per year for 5 years exceeds

Uploaded by

student ww
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

ASSIGNMENT:1

Q1. Describe why it is important to perform marginal analysis?

Importance of Marginal Analysis:


 Marginal analysis is helpful to individuals and businesses in balancing the costs
and benefits of additional actions, like whether to produce more, consume more,
and similar other decisions, thus determining whether the benefits will exceed
costs and increase utility
 Marginal analysis helps to break down these decisions into smaller pieces so that
they are better understood and optimized
 Marginal analysis is also beneficial to the government policy makers. Weighing
the costs and benefits can help government officials in determining whether
allocating additional resources to a specific public program will generate extra
benefits for the general public. 

Q2. Explain Marginal Cost. Imagine that you’re out getting ice cream
with your friends or family. You can choose whether to buy one, two,
or three scoops of ice cream. One scoop costs $5.00, two scoops cost
$8.00, and three scoops cost $11.00. What is the marginal cost for
each scoop of ice cream .

Marginal Cost:
Marginal cost is the difference (or change) in cost of a different choice , the increase in
total cost would be if one more unit of the control variable were added, this is also
called the marginal cost of the added unit.

Marginal Cost = Increase in Total Costs per unit of control variable. TC / Qcv = MC

Scoop of Ice- 1 Scoop 2 Scoop 3 Scoop


Cream
Total Cost $5.00 $8.00 $11.00
Marginal Cost $5.00 $4.00 $3.00
Q3. Two brothers own a business and are considering to open a new
franchise. They estimate that the project would cost $10 million in
expenses and that their profit would increase by $3 million per year
for the next 5 years. What should be their decision about opening of a
new franchise and why?

Solution:
Given Data:

Total Cost=$10Million

Marginal Benefit=$3 Million

Answer:

If marginal benefit is more than the marginal cost, it should have more additional unit.

In this case the marginal cost which is $10 is less than the marginal benefit for 5 years.
So, They should open a new franchise because in the next 5 years they would get a total
benefit of $15 million which is more than they invested .

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