Question

Determine if the following statements use optimization by total values or optimization by
marginal analysis.

a. Jan is living in New Jersey but frequently travels to Europe for work. He has three major
airline loyalty schemes to choose from: Star Alliance, Sky Team, and One World.
Assuming that Star Alliance offers the best services onboard (net benefit is $100 per trip),
Sky Team the best prices (net benefit is $80 per trip), and One World the fastest planes
(net benefit is $60 per trip), which option should Jan pick? Which optimization strategy is
he using?
b. Megan is thinking about buying a car. She likes fast sports cars and is considering buying
either a Nissan Skyline or a BMW M3. The Nissan Skyline was featured in many movies
and, should she drive it, she hopes that everyone will think of her as being cool. On the
other hand, buying a BMW M3 is probably going to be less expensive. She also assigns
net benefits to both cars: $1,500 for the Nissan and $1,200 for the BMW. Which strategy
is she using?

Answer 1

Optimization using total value calculates the total net benefits of different alternatives whereas Optimization using marginal analysis analyzes the change in the net benefits resulting from a shift from one alternative to another

In both cases, the person has calculated the total net benefits of different alternatives available.

In case 1, Jan calculated the total net benefits in the case of each scheme. So, the net benefit is highest in Star Alliance, hence he shall use this as per the optimization using total value.

Similarly, in case 2, Megan thinks of buying a car. She likes fast sports cars and is considering buying
either a Nissan Skyline or a BMW M3. The Nissan Skyline was featured in many movies and, should she drive it, she hopes that everyone will think of her as being cool. On the other hand, buying a BMW M3 is probably going to be less expensive.She assigns net benefits to both cars which means she is using Optimization using total value.