Explain the following statement: "Good decisions typically require marginal analysis, which weighs added costs against added benefits."

Answer 1

A marginal analysis of an economic decision requires considering the marginal costs of taking the proposed action against the 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, the costs of writing additional tickets. Most other costs must be paid whether the plane contains 20 passengers of 120 . 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 very small marginal cost. The decision to earn extra income at a slight cost would be a good economic decision.