Read this article to learn about one of the fundamental terms in economics: marginal analysis. Specifically, understand the concept of marginal benefit and marginal cost and what is meant in economics when we say that individuals make rational choices at the margin. Also, complete the problems in the "Try It" box and check your answers.
Peyton and Paul are brothers who own a manufacturing business and are considering opening a new distribution center. They estimate that the project would add $5 million in expenses and that their profit would increase by $1.5 million per year for the
next 5 years (other things equal). Peyton and Paul decide
- Not to go ahead with the project because the marginal cost it too high.
- to go ahead with the project because the marginal cost of the expansion project is low compared to other similar projects.
- to go ahead with the project because the expected marginal benefit ($7.5 million over 5 years) is greater than the estimated marginal cost of the project ($5 million).