3.5

Question 1

Principles of Marginal Analysis

Answer 1

• Activities should continue until the marginal
  benefit equals marginal cost
• Weighing the costs and benefits of additional
  production

Question 2

Benefits: MR

Answer 2

Additional revenue generated from producing 1 more unit.

Question 3

Costs: MC

Answer 3

Additional cost from producing 1 more unit.

Question 4

Calculating MR and MC

Answer 4

Marginal Revenue = ΔTR/ΔQ
Marginal Cost = ΔTC/ΔQ
Optimal Output / Profit Maximizing Rule -

MR = MC
MR>MC - profit from the last unit
MR<MC - loss from the last unit

Question 5

Profit Maximization

Answer 5

MC > MR: loss from producing the last unit
* MC < MR: profit from the last unit
* Optimal Output / Profit Maximization Rule

MC = MR

• If there isn’t a quantity where MC = MR, get
  as close as possible, without MC exceeding
  MR

Question 6

Profit Maximizing Rule

Answer 6

MC = MR