Marginal Benefit and Marginal Cost

Question 1

What does marginal benefit show and what does marginal cost show?

Answer 1

Marginal benefit is the utility/ satisfaction of consuming one more unit

Marginal cost is the cost of producing one more unit

Question 2

What is diminishing utility?

Answer 2

The reducing satisfaction of consuming more and more units, shows that we are willing to pay less as quantity increases

Question 3

Which curve shows marginal benefit?

Answer 3

The demand curve

Question 4

When will consumption stop?

Answer 4

When marginal benefit = marginal cost consumption stops because the next unit will not have any extra benefit and there is an opportunity cost (e.g. could gain more utility from consuming something else)

Question 5

Which curve shows marginal cost?

Answer 5

The supply curve

Question 6

Why does the supply curve show marginal cost?

Answer 6

Marginal cost increases as more units are produced due to diminishing returns. Therefore, the price increases to make firms more willing and able to produce

Question 7

Where would a market be allocatively efficient and why?

Answer 7

It will be allocatively efficient at marginal benefit = marginal cost

This is because there is no additional benefit at this point when another unit is produced/ consumed