# chapter3 - Chapter3Marginal AnalysisforOptimal Decision...

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Chapter 3 – Marginal  Analysis for Optimal  Decision

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Optimization An optimization problem involves the specification of three things: Objective function to be maximized or minimized Profit Maximization Cost Minimization Activities or choice variables that determine the value of the objective function Any constraints that may restrict the values of the choice variables Maximize utility subject to a budget constraint
Choice Variables Choice variables determine the value of the objective function Continuous variables Can choose from uninterrupted span of variables Discrete variables Must choose from a span of variables that is interrupted by gaps

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Net Benefit Net Benefit (NB) Difference between total benefit (TB) and total cost (TC) for the activity NB = TB – TC Optimal level of the activity (A*) is the level that maximizes net benefit
Optimal Level of Activity

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Optimal Level of an Activity
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chapter3 - Chapter3Marginal AnalysisforOptimal Decision...

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