Marginal Cost (MC) – The extra cost we WILL incur when we
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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).

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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

$1 2

.50 4


Burgers Marginal Benefit

2nd $1.00

4th .50

Demand

Price Quantity

$1 2

.50 4

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.

Demand

Price Quantity

$1 2

.50 4

RESERVATION PRICES!!!!!!!!!!!!!!!



We buy

to point where

MC = MB

(just like we do everything

else to point where mc=mb)


Demand

Price Quantity

$1 2

.50 4


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!


Demand

Price Quantity

$1 2

.50 4


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.


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

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.


P

$3

D

7000

Q


P

$3

D

7000

Q


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