Question

Hours Open Total Revenue (dollars) 1 $275 2 375 3 450 4 500 5 53 6 550 Ivan runs a custom jewelry shop in Sparkle City. He is debating whether he should extend his hours of operation. Ivan figures that his sales revenue will depend on the number of additional hours the jewelry shop is open as shown in the table above. He would have to hire a worker for those hours at a wage rate of $25 per hour. a) What does the word "marginal" mean in economics? What is a marginal benefit? What is a marginal cost? What is marginal analysis? b) Using marginal analysis, how many hours should Ivan extend his hours of operations? c) What is Ivan's marginal benefit if he decides to stay open for six hours instead of five hours? d) What is Ivan's marginal cost if he decides to stay open for six hours instead of five hours?

Answer 1

A).

In economics “marginal” means change in some economic factor as result of the change in some other economic factor. So, here “MB” benefit measures the change in “total benefit” or the additional benefit from the consumption of some good or from some act. Similarly, the “MC” measures the change in “TC” or additional cost from the production of additional unit of good.

So, according to the marginal analysis “MB” must be equal to “MC”, => at the equilibrium “MB=MC”. For example in consumption if “MB>MC” we should increase the consumption until the perfect equality holds. Similarly, if “MB<MC” we should reduce the consumption until the perfect equality hold, => at the optimum “MB=MC”.

B).

Consider the following table shows the MR for each hour’s of operations.

Now, the MC of hiring worker is “25” per hour. So, here for “H=5” the “MR=30 >MC”, => Ivan should increase its operation for additional hour but for “H=6” “MR < MC”, => Ivan should decrease its operation by one hour, => the optimum number of hour is “H=5”.

C).

Now, the TR for “H=6” is “550” and the same for “H=5” is “530”, => the MR for “H=6” is given by “550-530=20”.

D).

The cost of hiring worker is “25 per hour”, => the MC for 6 hours instead of 5 is “25”, => MC=25.