Marginal Cost (MC) – The extra cost we WILL incur when we commit an act one more time (commit the act of buying one more unit). Marginal Benefit (MB) –

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Presentation transcript:

Marginal Cost (MC) – The extra cost we WILL incur when we commit an act one more time (commit the act of buying one more unit). Marginal Benefit (MB) – The extra benefit we WILL receive when we commit an act one more time (commit the act of buying one more unit). If MB greater than MC, we commit the act one more time (commit the act of buying one more unit). If MB less than MC, we don’t commit the act one more time (commit the act of buying one more unit). We will commit an act (one more time) repeatedly as long as MB > MC up through the point where MB = MC. That’s the last time we commit the act (or buy one more unit).

Burgers Marginal Benefit 2nd $1.00 4th.50 Demand Price Quantity $

Burgers Marginal Benefit 2nd $1.00 4th.50 Demand Price Quantity $ RESERVATION PRICES!!!!!!!!!!!!!!!

Demand Price Quantity $ RESERVATION PRICES!!!!!!!!!!!!!!! IF MAXIMUM PRICE (mc) WE'LL PAY FOR THE 2ND IS $1, IT MUST MEAN THAT THE MB OF THE 2ND IS $1.

Why?

We buy to point where MC = MB ( just like we do everything else to point where mc=mb )

BurgerMBMC 1st>$1$1 2nd$11$ 3rd>$.50 and <$11$ 4th$.501$

BurgerMBMC 1st>$1$1 2nd$11$ 3rd>$.50 and <$11$ 4th$.501$ Demand Price Quantity $

Burgers Marginal Benefit 2nd $1.00 4th.50 MB of 2nd = to satisfaction we could have gotten by spending $1 the next best way.

Burgers Marginal Benefit 2nd $1.00 4th.50 MB of 2nd = to satisfaction we could have gotten by spending $1 the next best way. How much satisfaction is that? IN REAL LIFE, We don't know!

BurgerMBMC 1st>$1$.50 2nd$1.50 3rd>$.50 and <$1.50 4th$.50.50

BurgerMBMC 1st>$1$.50 2nd$1.50 3rd>$.50 and <$1.50 4th$ Demand Price Quantity $

Burgers Marginal Benefit 2nd $1.00 4th.50 MB of 4th = to satisfaction we could have gotten by spending $.50 the next best way.

Burgers Marginal Benefit 2nd $1.00 4th.50 MB of 4th = to satisfaction we could have gotten by spending $.50 the next best way. How much satisfaction is that? IN REAL LIFE, We don't know!

Burgers Marginal Benefit 2nd $1.00 4th.50 But we do know something for sure. The marginal utility of 2nd is greater than the marginal utility of 4th.

...because $1 spent next best way will always buy more satisfaction (utils) than $.5 spent next best way. Burgers Marginal Benefit 2nd $1.00 4th.50 But we do know something for sure. The marginal utility of 2nd is greater than the marginal utility of 4th.

And if MB of 2nd hamburger = $1, and the MB of the 1st HOTDOG = $.75, you prefer 2nd burger to 1st hotdog......more utils from 2nd burger than from first hotdog,...because $1 spent next best way will always buy more satisfaction (utils) than $.75 spent next best way. Burgers Marginal Benefit 2nd $1.00 4th.50

P Q D $3 7000

P Q D $3 7000