Explain the following statement: “Good decisions typically require marginal analysis, which weighs added costs against added benefits.”
What will be an ideal response?
A marginal analysis of an economic decision requires considering the marginal costs of taking the proposed action against the additional benefits of taking the action. A good example is the case of an airlines, which is considering whether to sell empty seats at a reduced price. Can or should they do so? To make that determination, the airline must consider the cost of having additional passengers fly, such as food and beverage costs and the costs of writing additional tickets. Most other costs must be paid whether the plane contains 20 or 120 passengers. In this case, it makes sense to sell tickets at a reduced price and have those additional revenues contribute to the company’s profit. If the company refuses to sell tickets at a reduced price, and some seats remain empty, the company will pass up the opportunity to generate more income at a low marginal cost. The decision to earn extra income at a slight cost represents a good economic decision.
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Peter was recently hired as a salesman for a national consulting firm. His job involves spending a significant portion of his time out of the office visiting prospects and attending conferences. Which of the following is a strategy the consulting firm may employ to discourage Peter from shirking his responsibilities?
a. Tell Peter that the shareholders want to earn a large profit this year. b. Pay Peter commissions on what he sells after the work has been completed. c. Allow Peter to set his own schedule and work from home frequently. d. Pay Peter a lower wage than he would earn in a similar job at another firm.
Which country best reinforces the idea that the higher the real GDP per capita is, the more satisfied people are in that country?
a. India
b. China
c. Russia
d. Norway
A firm with two plants, A and B, has the following estimated demand and marginal cost functions:Qd = 120 - 10PMCA = 4 + (1 / 5)QAMCB = 6 + (1 / 10)QBHow should the firm allocate total output between the two plants in order to maximize profit?
A. produce 20 units in plant A, 20 units in plant B B. produce 5 units in plant A, 10 units in plant B C. produce 15 units in plant A, 10 units in plant B D. produce 20 units in plant A, 25 units in plant B E. none of the above
In a competitive industry the market-determined price is $12. A firm is currently producing 50 units of output; average total cost is $10, marginal cost is $15, and average variable cost is $7. In order to maximize profit, the firm should:
A. produce more because the firm is earning a profit of $100. B. produce more because the next unit of output increases profit by $2. C. keep output the same because the firm is earning a profit of $100. D. produce less because the last unit of output decreased profit by $3.