MGE 302 Lecture Notes - Lecture 3: Marginalism, Sunk Costs, Marginal Utility
13 Dec 2018
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Document Summary
Marginal analysis involves changing the value of a choice variable by a small amount to see if the objective function can be further increased (in the case of maximization problems) or further decreased (in the case of minimization problems). Net benefit from an activity (nb) is the difference between total benefit (tb) and total cost (tc ) for the activity: nb = tb. The net benefit function is the objective function to be maximized in unconstrained maximization problems. The optimal level of the activity (a*) is the level of activity that maximizes net benefit. The choice variables determine the value of the objective function. Choice variables can be either continuous or discrete. A choice variable is continuous if the decision maker can choose from an uninterrupted span (or continuum) of values. Marginal benefit (mb) is the change in total benefit caused by an incremental change in the level of activity.
