08 Day 7 Marginal Analysis - Equimarginal Principle The...

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1 Equimarginal Principle • The equimarginal principle says that profits will be maximized when the last dollar spent for each of several uses makes equal contributions to returns Assume you have unlimited capital • Where would you put your 1 st $200? • Where would you put your 2 nd $200? • What about your 10 th ? 218 240 -200 8 218 315 100 7 218 370 200 6 218 410 300 5 218 425 400 4 218 460 700 3 218 470 900 2 218 490 1400 1 Government Bonds Fattening Steers Barley (in $200 units) Added Returns from investing operating capital Units of Capital Where would you put your 1st $200? •Where would you put your 2nd $200? Opportunity Cost • Opportunity cost and the equimarginal principle are closely related. • Opportunity cost means the value of a resources in its best alternative use. Opportunity cost is the value of a product not realized because resources were directed to an alternative use Substitution of Inputs –Alternative production methods –Input can substitute for each other –Constant rate of substitution –Diminishing rate of substitution Key Points • Substitute one input for another as long as the cost of the added input is less than the replaced input. • With a constant rate of substitution use all of one input or all of the other input.
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2 Key Points • Substitute one input for another as long as the cost of the added input is less than the replaced input • With a constant rate of substitution use all of one input or all of the other input • Substitute one resource for another as long as more is subtracted from total cost than is added or as long as the Marginal Rate of Substitution (MRS) is greater than price
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08 Day 7 Marginal Analysis - Equimarginal Principle The...

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