Chapter One Homework due tomorrow in lab Numbers 10, 12 and 17

Managerial Economics & Business Strategy Chapter 1 The Fundamentals of Managerial Economics

Net Benefits Net Benefits = Total Benefits - Total Costs Profits = Revenue - Costs

Marginal Benefit (MB) Change in total benefits arising from a change in the control variable, Q: Slope (first derivative) of the total benefit curve.

Marginal Cost (MC) Change in total costs arising from a change in the control variable, Q: Slope (first derivative) of the total cost curve

Marginal Principle To maximize net benefits MB = MC. MB > MC means the last unit of the control variable increased benefits more than it increased costs. MB < MC means the last unit of the control variable increased costs more than it increased benefits. Can we do it??? Start with a control variable that can only be used in WHOLE units (discrete)

Control Variable Total Benefits Total Costs Net Benefits Marginal Benefits Marginal Costs Marginal Net Benefits QB(Q)C(Q)N(Q)MB(Q)MC(Q)MNB(Q)

Control Variable Total Benefits Total Costs Net Benefits Marginal Benefits Marginal Costs Marginal Net Benefits QB(Q)C(Q)N(Q)MB(Q)MC(Q)MNB(Q)

Control Variable Total Benefits Total Costs Net Benefits Marginal Benefits Marginal Costs Marginal Net Benefits QB(Q)C(Q)N(Q)MB(Q)MC(Q)MNB(Q)

Control Variable Total Benefits Total Costs Net Benefits Marginal Benefits Marginal Costs Marginal Net Benefits QB(Q)C(Q)N(Q)MB(Q)MC(Q)MNB(Q)

Control Variable Total Benefits Total Costs Net Benefits Marginal Benefits Marginal Costs Marginal Net Benefits QB(Q)C(Q)N(Q)MB(Q)MC(Q)MNB(Q)

What if we can use fractional parts of the control variable? Q Total Benefits & Total Costs Benefits Costs Q* B C Slope = MC Slope =MB

Let’s talk calculus… What is the MB? n Y What is the MC? n 8Y What is the profit max level of Y? n Y = 8Y n 300=20Y n Y=15 What are the Net Benefits at this level of Y? n NB = ((300*15)-(6*15^2))-(4*15^2) n NB = 2250

One more check….Is it a maximum point?? Second derivative of the Net Benefit equation must be negative N(Y) = B(Y)-C(Y) First derivative n (300-12Y)-8Y Second derivative n -12-8= -20 n Negative  Maximum Shows n N(Y) is concave n Slope of MB curve < slope of MC curve