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Essay question #1, Midterm #1
z
A) Imagine that Mandy is now
doing shopping with her boyfriend
in a department store. She is
deciding how many cosmetic
products she should purchase to
maximize her beautifulness in a
dancing party tonight.
The
following list summarizes her total
benefits and costs for the number
of cosmetic product(s) she
purchases.
160
435
8
140
430
7
120
420
6
100
400
5
80
360
4
60
300
3
40
220
2
20
120
1
0
0
0
Total
cost
($)
Total
benefit
($)
Unit(s) of
cosmetic
product
purchased
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View Full Document Solution to Essay question #1 (1)
z
Based on the above table, how many unit(s) of cosmetic product
should Mandy purchase?
(5 marks)
z
It seems logical to find a specific unit of cosmetic products
purchased where the difference between total benefit and total
cost is the greatest
z
If this is true, the optimal unit of cosmetic products will be either 5
or 6 units
z
However, as we have discussed before. In Economics, we look at
marginal values to decide whether to pursue for an action
z
Costbenefit principle
z
We pursue for a next unit of action if and only if the (marginal) benefit
is greater than the (marginal) cost
z
Therefore, to answer this part, we will need to compute
the marginal benefits and marginal costs
20
160
5
435
8
20
120
20
420
6
20
100
40
400
5
20
80
60
360
4
20
60
80
300
3
20
40
100
220
2
20
20
120
120
1
0
0
0
0
0
Marginal cost ($)
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This note was uploaded on 09/06/2010 for the course FBE ECON1001 taught by Professor Dr.demurger during the Fall '08 term at HKU.
 Fall '08
 DR.DEMURGER

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