MNG ECO WEEK 3 DQ #1: a. What would be a situation in your personal or professio
ID: 1133966 • Letter: M
Question
MNG ECO WEEK 3 DQ #1:
a. What would be a situation in your personal or professional life in which you use or could use marginal analysis to make a decision?
b. How would you determine Marginal Benefit and Marginal Cost of a business decision? You need to illustrate your answer with a numerical example.
c. Why do economists believe that managers should use marginal analysis to make optimal business decisions?
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Explanation / Answer
Answer:
The marginal analysis involves a cost-versus-benefits comparison of various business activities. In marginal analysis, the cost of an activity is measured against incremental changes in volume to determine how the overall change in cost will affect the bottom line of a business.And therefore, marginal analysis involves comparing the benefit of doing a little bit more of some activity with the cost of doing a little bit more of that activity.
The benefit of doing a little bit more of something is called as its marginal benefit, and the cost of doing a little bit more of something is called as its marginal cost.Lets assume that as the CEO of Walmart, a decision needs to be made on the addition of a new product in stores. The marginal benefit will be the turnover generated by the addition of the product whereas the marginal cost will be the cost of adding to product to the shelves. The theory of marginal analysis states that whenever marginal benefit exceeds marginal cost, there should be an increase in the activity to reach the highest net benefit.
Similarly, if marginal cost is higher than marginal benefit, activity should be decreased. Sunk costs, fixed costs and average costs do not affect marginal analysis. They are irrelevant to the optimal decision-making.
For example, marginal analysis shows that the additional product provides net marginal benefit. This does not necessarily make the addittion the right decision. Suppose it is also know that giving more space to an existing product yields even larger net marginal benefit. In this case, adding a new product is the wrong decision because it is suboptimal. The opportunity cost (cost of the loss of other alternatives when one alternative is chosen) is higher in this case, making it suboptimal.
When choices are made (collectively or by an individual) to accept having less of one thing in order to get more of something else, the results are called trade-offs.
We are allocating (limited) space, the trade-off involves reduced space for the existing products in order to be able to give the space to the addttional product.
Therefore, as the CEO one would keep adding addittional products till the point it generates maximum net gain. This point is called as the optimal point. After this point the marginal cost starts exceeding the marginal benefi. In marginal analysis we are weighing the benefits versus the cost.
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