Question

How do you use the concepts of marginal cost and marginal benefit when making decisions daily? The goal is for us to evaluate how often we use a benefit-cost analysis in marginal terms in our daily lives, without realizing it, and how to improve our decision-making after a careful evaluation of all relevant costs and benefits involved. What is your opportunity cost of attending classes on campus? For the purposes of keeping things simple, focus on finding the opportunity cost, expressed as a dollar amount of your opportunity cost of attending a one-hour class on campus. First, find all your alternatives to attending class. Then assign a dollar value to each alternative. Next rank your alternatives, and last, based on the highest ranked alternative, share your opportunity cost. Since you have made the decision to take this course online, how would your opportunity cost compare to that of another student already taking the same course on campus. Explain.

Answer 1

The concepts of marginal cost and marginal benefit when making decisions daily :

Economists say that we are always using marginal analysis (looking at marginal costs and marginal benefits) when we decide what to do in our daily lives. The costs and benefits can be tangible or intangible. Here are some examples:

• My family plans a trip to Disneyland. We can buy a 3 day pass to Disneyland or a 5 day pass. Will the marginal cost of the 5 day pass (whatever the difference in price plus two more nights of hotel and food) be more or less than the marginal benefit (the extra fun of having two more days there)?
• A parent needs to decide whether to work overtime. Will the marginal benefit (the extra money) be greater than the marginal cost (loss of time at home with the family)?
• I am going shopping for groceries and I have to decide whether to buy organic or conventional vegetables. Will the marginal cost (how much more the organics cost) be greater than the marginal benefit (healthier food, perhaps, and less impact on the environment)?

In all of these cases, it is up to the person involved to do the calculation. There is no actual right answer because these are examples where either the cost or the benefit is intangible.

Marginal cost and marginal benefit are important factors when making economic decisions. Marginal cost is the cost of getting more of something. Marginal benefit is the gain we receive by getting more of something. These concepts play an important role in our economic decision-making.

For example, I am a tall person. When I travel by airplane, I have to decide if the marginal cost of paying more for a seat with more legroom is worth the benefit of getting the additional legroom. I usually feel the marginal benefit of the legroom outweighs the marginal cost, especially on longer flights.

Another example would be to decide if I should buy a weekly subway pass or pay for each trip I take. I have to decide if the additional benefit outweighs the additional cost. With a weekly pass, I can ride an unlimited number of times during the week, and I don’t have to wait in line to buy the pass each time I travel. The cost is the additional amount I pay for the pass. If I don’t use the pass as much as I thought I would use it, I would lose money.

We use these concepts quite often when we make economic decisions.

Marginal cost is the increase in total cost by producing one additional unit of a product or service. Marginal benefit is the increase in total benefit by consuming one additional unit of a product or service.

An example of use of marginal cost and marginal decision for making daily decisions is decision of how much TV to watch. Each additional hour spent on watching TV has opportunity cost since that hour could be spent in studying for a test or exercising or working. Each additional hour spent on watching TV also has marginal benefit. The optimal time for watching TV is when the marginal cost is equal to the marginal benefit.