marginal+analysis+-+Marginal+Benefit+including+marginal+revenue+and+Marginal+cost


 * Marginal Analysis**

A technique, in microeconomics, where minimal changes in certain variables are studied in terms of the effect on related variables and the overall system as a whole. Utilizing analysis such as this, it is possible to gain insight into how much additional inputs are required to obtain the optimal outputs, thus leading to [|profit maximization].


 * Marginal revenue** is the extra revenue generated when a firm sells one more unit of output. It plays a key role in the profit maximizing decision of a firm relative to marginal cost. For example, selling one window generates $100 of revenue, selling a second window increases total revenue to $200. In this case, marginal revenue would be $100 for selling the second (or next available) unit.


 * Marginal Cost** is the change in total cost that arises when the quantity produced changes by one unit. Examples of items that could lead to marginal cost rising or falling could be shortage of raw materials and cost savings from purchasing in economies of scale respectively. Ex. If the total cost of producing 1 window is $50 and the total cost of producing two windows is $90, the //marginal cost// of producing the second window is $40.


 * Marginal Benefit** can be defined as Marginal Revenue minus Marginal Cost. Benefits can be expressed in terms of units of utility or satisfaction, or sometimes they can be expressed in dollar amounts. Utilizing the information from the example above, one could determine that the marginal benefit of producing the second window would be $60. Marginal Revenue ($100) - Marginal Cost ($40) = Marginal Benefit ($60)

Use the information in the following table to answer the questions below.


 * Quantity || Total Revenue || Total Cost ||
 * 1 || 100 || 50 ||
 * 2 || 200 || 90 ||
 * 3 || 290 || 130 ||
 * 4 || 380 || 160 ||


 * Questions:**

1. What is the marginal revenue of the third window sold? a. $100 b. $ 90 c. $190

Answer: b. $90, The revenue generated by the sale of the third window raises total revenue from $200 up to $290. $290 - $200 = $90

2. What is the marginal cost of producing the third window? a. $ 90 b. $130 c. $ 40

Answer: c. $40, The total cost of producing the third window increased the from $90 on the second window to $130 on the third window. $130 - $90 = $40

3. Earlier we defined marginal benefit as marginal revenue minus marginal cost. What would be the marginal benefit of producing the third window? a. $90 b. $5 c. $40

Answer: b. $50, The marginal revenue of selling the third window was $90 minus the marginal cost of producing the third window of $40 equals the marginal benefit of $50.

4. With information from question 3 in hand, would it be advisable to produce and sell unit number three of the windows? a. yes b. no

Answer: a. yes, The marginal benefit was a positive number thus leading to additional profit.

5. There has been a major fire at your only supplier for a key component in your manufacturing process. Would you expect your marginal cost to increase as result of this incident? a. yes b. no

Answer: a. yes. The fire will more than likely cause the cost of your component to increase as there will almost definately be a shortage of supply.

References:

"Marginal Analysis". [|humboldt.edu], [|**http://sorrel.humboldt.edu/~economic/econ104/marginal/**]**, accessed on 9/21/07

"Marginal Analysis, A Key to Economic Analysis". ncsu.edu,** [|www.cals.ncsu.edu/course/are012/lectureppt/lectur10.ppt], accessed on 9/22/07