Marginal cost and benefit relationship questions

Multiple Choice Quiz

marginal cost and benefit relationship questions

Multiple Choice Quiz. Relationships between economic variables can be expressed in the form of. a. a graph c. marginal benefit will be equal to marginal cost. Marginal Cost (MC) is the additional cost due to adding one more unit of good for consumption by a consumer. A rational individua Other factor that affect marginal benefit and marginal cost is availibility. Undo. Related Questions ( More Answers Below) . What is the relation of marginal benefits and marginal costs?. Marginal costs and benefits are a vital part of economics because they help to When considering environmental issues, the intersection is also important.

Social cost Of great importance in the theory of marginal cost is the distinction between the marginal private and social costs. The marginal private cost shows the cost associated to the firm in question. It is the marginal private cost that is used by business decision makers in their profit maximization goals. Marginal social cost is similar to private cost in that it includes the cost of private enterprise but also any other cost or offsetting benefit to society to parties having no direct association with purchase or sale of the product.

marginal cost and benefit relationship questions

It incorporates all negative and positive externalitiesof both production and consumption. Examples might include a social cost from air pollution affecting third parties or a social benefit from flu shots protecting others from infection. Externalities are costs or benefits that are not borne by the parties to the economic transaction.

Marginal cost - Wikipedia

A producer may, for example, pollute the environment, and others may bear those costs. A consumer may consume a good which produces benefits for society, such as education; because the individual does not receive all of the benefits, he may consume less than efficiency would suggest. Alternatively, an individual may be a smoker or alcoholic and impose costs on others. In these cases, production or consumption of the good in question may differ from the optimum level.

Negative externalities of production[ edit ] Negative Externalities of Production Much of the time, private and social costs do not diverge from one another, but at times social costs may be either greater or less than private costs. When marginal social costs of production are greater than that of the private cost function, we see the occurrence of a negative externality of production.

marginal cost and benefit relationship questions

Productive processes that result in pollution are a textbook example of production that creates negative externalities. Such externalities are a result of firms externalizing their costs onto a third party in order to reduce their own total cost.

As a result of externalizing such costs, we see that members of society will be negatively affected by such behavior of the firm. In this case, we see that an increased cost of production in society creates a social cost curve that depicts a greater cost than the private cost curve.

In an equilibrium state, we see that markets creating negative externalities of production will overproduce that good. As a result, the socially optimal production level would be lower than that observed.

Marginal cost

Positive externalities of production[ edit ] Positive Externalities of Production When marginal social costs of production are less than that of the private cost function, we see the occurrence of a positive externality of production.

Production of public goods are a textbook example of production that create positive externalities. An example of such a public good, which creates a divergence in social and private costs, includes the production of education.

marginal cost and benefit relationship questions

It is often seen that education is a positive for any whole society, as well as a positive for those directly involved in the market.

Examining the relevant diagram we see that such production creates a social cost curve that is less than that of the private curve. Mathematically speaking, it is the derivative of the total cost. Marginal cost is an important measurement because it accounts for increasing or decreasing costs of production, which allows a company to evaluate how much they actually pay to?

Initially, marginal cost will normally decrease through a short range, but increase as more is produced. Therefore the marginal cost curve is typically thought of to be upward sloping and can represent a wide range of activities that can reduce the effects of environmental externalities, like pollution. The key point is that most environmental improvements are not free; resources must be expended in order for any improvement to occur. For example, take an environment that has been polluted—while the initial unit of cleanup may be cheap, it becomes more and more expensive as additional cleanup is done.

If cleanup is undertaken to point? Marginal benefit is similar to marginal cost in that it is a measurement of the change in benefits over the change in quantity. Again take an environment that has been polluted, the first unit of this pollution that is cleaned up has a very high benefit value to consumers. Each additional unit is valued at a somewhat lower level than each previous one because the overall pollution level continues to decrease.

Once the pollution is reduced below a certain point, the marginal benefit of additional pollution control measures will be negligible because the environment itself is able to absorb a low level of pollution. Taking a look at the graph above, the total consumer benefit that is represented as the dark grey area, the net benefit is greatest when the quantity—? We could increase total benefit by adding pollution controls beyond Q, but only with marginal costs MC greater than marginal benefits MBso it is no longer efficient to continue to increase the benefits.

Oftentimes, benefits are more difficult to measure because they are not always monetary.