Chapter 9, Problem aWYWL

To determine

To answer:

Why good decision making depend upon accurately defining costs and benefits

Concept Introduction:

Marginal cost: Marginal cost is the additional cost made to the total cost in the production of an additional unit of the commodity

Marginal benefit: The marginal benefit is the additional benefit resulted from producing the additional unit of a good or service.

Marginal Analysis: Marginal analysis is used to compare the benefits and cost derives out of a specific action. The marginal changes refers to the small incremental adjustment to a plan of action

Explanation of Solution

The good decision making depend upon the costs and benefits of the given activity to be more specific we can say that it depends upon the marginal cost and marginal benefits. The decision making used by marginal cost and benefit called marginal analysis. For an example the marginal cost of a given activity outweighs it marginal benefit then people should avoid that activity. The famous economist Gregory Mankiw wrote in his book that ‘the rational people always look at the margin’. So a consumer will consume a particular good until his or her marginal benefit is equal to the marginal cost. When we take the case of production is only benefited when the marginal benefit is greater than the marginal cost, when this happens the producer will have to produce more. When the marginal cost of production outweighs the marginal benefit here the producer should try to decrease the production. So it is always important to consider marginal cost and marginal benefit when making the decision. The rational people always look at the margin