Question

(Chapter 2) talks about the budget constraint, and the concepts of opportunity cost and marginal decision making. I want you to share about a recent decision making or coming decision that you have to make, and how these economic concepts fit into your decision making? What are some marginal costs (opportunity cost) and marginal benefits (utility) associated with such a decision?

Answer 1

A decision:

Suppose a decision has to be taken for either producing sanitizer or producing mask or producing the both in recent pandemic, COVID19. There is an increasing demand for both these products throughout the world. The capability of investing by the firm is the budget constraint (suppose this is $100,000) – this is the maximum possible amount of spending.

Mask is basically a labor-intensive program (major cost is labor payment); it doesn’t require huge capital investment. Sanitizer is a capital-intensive program, which requires huge capital investments in the field of autonomous tool, machinery, and factory setup.

$100,000 is not at all sufficient for the production of sanitizer; therefore, a decision has been taken for producing mask only.

Marginal cost:

This is the additional amount of cost for each additional unit of production. If these two productions (mask and sanitizer) are considered, the production of sanitizer requires an arrangement of huge amount of loan from bank, charging interest. This interest cost is the marginal cost of producing sanitizer, compare to mask; the firm doesn’t want to bear such marginal cost; therefore, it takes the opportunity of producing mask only.

Marginal benefit:

This is the extra amount of benefit coming out of the mask production, compare to the sanitizer production. It saves electricity consumption, transportation cost, loading and unloading cost, and distribution cost; the aggregate of monetary value of such savings is $15,000; this also counted as favorable for mask in the above decision making.