Activity Total Benefit – Total Cost Exercise

Subject: Consumer Behavior

Paper Model: APA

Paper Type: Business Plan

Total Words: 539

Document Outline

Introduction

Solution

Optimal Value


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marginal product, marginal cost, marginal benefit, marginal damage, etc.. The larger academic and professional community, however, is more concerned about totals: total cost, total benefit, total profit. One goal of a cost-benefit exercise may be to arrive at a recommendation that will result in the greatest net benefit minus the cost. That is the point of this exercise, which will address Learning Outcomes A11 and A12.

You have been given the following data on a proposed project:

Total Benefit (TB) = 314X – 1.6X2

Total Cost (TC) = 50X + 1.7X2

Marginal Benefit (MB) = 314 – 3.2X

Marginal Cost (MC) = 50 + 3.4X

In this case, X represents the size of a proposed project (say a dam, or a canal system), and you have been told that X can range from 35 to 45. Using the Total Benefit and Total Cost equations presented above, figure out: a) the optimal value of X (in other words, the value of X that gives the greatest net benefit minus costs.) If you plug this optimal value of X into the Marginal Benefit and Marginal cost functions, b) what value do you arrive at? Pick a different value of X (say, one unit greater,) c) what value do you arrive at? If you select a value of X that is one unit below the optimal value of X, d) what value do you arrive at for the MB and MC?

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