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Maximizing Net Benefits in Managerial Economics: Fundamentals & Strategies

Learn how to optimize net benefits by understanding marginal benefit and cost principles in Managerial Economics. Solve problems to find profit-maximizing levels using calculus and explore total benefits and costs. Practice with discrete and fractional control variables.

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Maximizing Net Benefits in Managerial Economics: Fundamentals & Strategies

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  1. Chapter One Homeworkdue tomorrow in lab Numbers 10, 12 and 17

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

  3. Net Benefits • Net Benefits = Total Benefits - Total Costs • Profits = Revenue - Costs

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

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

  6. Marginal Principle • To maximize net benefits MB = MC. • MB > MCmeans the last unit of the control variable increased benefits more than it increased costs. • MB < MCmeans 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)

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

  8. Let’s talk calculus… • What is the MB? • 300-12Y • What is the MC? • 8Y • What is the profit max level of Y? • 300-12Y = 8Y • 300=20Y • Y=15 • What are the Net Benefits at this level of Y? • NB = ((300*15)-(6*15^2))-(4*15^2) • NB = 2250

  9. 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 • (300-12Y)-8Y • Second derivative • -12-8= -20 • Negative  Maximum • Shows • N(Y) is concave • Slope of MB curve < slope of MC curve

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