Chapter 3: Marginal Analysis for Optimal Decisions

Question 1

activities or choice variables

Answer 1

Variables that determine the value of the objective function.

Question 2

average (unit) cost

Answer 2

Total cost per unit of activity computed by dividing total cost by the number of units of activity. [TC/A]

Question 3

constrained optimization

Answer 3

An optimization problem in which the decision maker chooses the levels of two or more activities that max or min the objective function; chooses values for the choice variables from a restricted set of values.

Question 4

continuous choice variables

Answer 4

A choice variable that can take any value between two end points. (2, 2.345, 7.9….22.56) [usually shown graphically]

Question 5

discrete choice ­variables

Answer 5

A choice variable that can take only a countable ­number of values / integer value. (1,2,3….10,20,30…) [usually shown in a table]

Question 6

fixed costs

Answer 6

Costs are constant and must be paid no matter what level of the activity is chosen

Question 7

marginal analysis

Answer 7

Analytical technique for solving optimization problems that involves changing values of choice variables by small amounts to see if the objective function can be further improved. / comparing MB and MC to see if NB can be increased by making incremental changes to level of activity

Question 8

marginal benefit (MB)

Answer 8

The change in total benefit caused by an incremental change in the level of an activity. [chTB/chA]; slope of the line tangent to the total benefit

Question 9

marginal cost (MC)

Answer 9

The change in total cost caused by an incremental change in the level of an activity. [chTC/chA]; slope of the line tangent to the total cost

Question 10

maximization problem

Answer 10

An optimization problem that involves maximizing the objective function.

Question 11

minimization problem

Answer 11

An optimization problem that involves minimizing the objective function.

Question 12

net benefit

Answer 12

The objective function to be maximized:

NB = TB − TC.

Question 13

objective function

Answer 13

The function the decision maker seeks to maximize or minimize.

Question 14

optimal level of activity

Answer 14

The level of activity that­ maximizes net benefit (A*); marginal benefits = marginal cost; total benefits - total costs is greatest

Question 15

sunk costs

Answer 15

Costs that have previously been paid and cannot be recovered.

Question 16

unconstrained optimization

Answer 16

An optimization problem in which the decision maker can choose the level of activity from an unrestricted set of values.

Question 17

2 important observations in unconstrained maximization problems

Answer 17

1. optimal level of activity does not generally result in maximization of total benefits
2. optimal level of activity in an unconstrained maximization problem does not result in minimization of total cost

Question 18

economists regard marginal analysis as…

Answer 18

the central organizing principal of economic theory

Question 19

marginal vs. total

Answer 19

marginal benefit and marginal costs are slopes of total benefit and total cost curves, respectively

Question 20

general constrained maximization problem

Answer 20

manager must choose the levels of two or more activities in order to maximize a total benefit function subject to a constraint in the form of a budget that restricts the amount that can be spent