2-2-09 - Chapter 5: Efficiency and Equity 2009 Marginal...

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Chapter 5: Efficiency and Equity 2-2- 2009 Marginal analysis Marginal benefit (MB)   additional benefit from the action Marginal cost (MC) cost from the action Marginal Social Benefit (MBS) benefit to society If benefit exceeds cost, we pursue the action. If cost exceeds the benefit, we do not pursue the  action. Fig. 1: Demand = MB = MSB, always… for now. Fig. 2: If the price of pizza is $6, then 80 million slices of pizza will be supplied. However, we could  associate the 80 million slices of pizza quantity with the $6. The interpretation of that price, $6,  is the minimum price for which a pizza producer would produce that 80 millionth pizza. No pizza  producer will produce a cheaper pizza. Example: Leonardo’s will not sell a pizza slice below $6, because it will not equal a marginal  cost, and they will not have an incentive to produce the slice. 
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2-2-09 - Chapter 5: Efficiency and Equity 2009 Marginal...

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