Questions: Marginal Analysis and Cost-Benefit Decisions
4 questions to test your understanding
Score: 0 / 4
Question 1 Multiple Choice
A student's marginal benefit from each extra hour of study is 10, 8, 6, 4, and 2 points for hours 1 to 5. The marginal cost of each hour is a constant 5. How many hours should the student study to maximize net benefit?
A1 hour
B3 hours
C4 hours
D5 hours
Hours 1 to 3 each add more benefit (10, 8, 6) than cost (5), so they raise net benefit. Hour 4 adds 4 but costs 5, so it lowers net benefit. The student should stop at 3 hours.
Question 2 Multiple Choice
A firm has already spent $2 million, which it cannot recover, on a project. Finishing will cost $1 million more and yield $1.5 million in revenue. Should the firm finish?
ANo, because total spending of $3 million exceeds revenue of $1.5 million
BYes, because the extra $1.5 million in revenue exceeds the extra $1 million in cost
CNo, because the project has already lost money
DIt depends only on how much has already been spent
The $2 million is sunk and is lost whether or not the firm finishes. The decision compares only future values: finishing adds $1.5 million of benefit for $1 million of cost, a gain of $0.5 million. Comparing total spending to revenue mixes in the sunk cost.
Question 3 True / False
At the quantity that maximizes net benefit, total benefit is also at its maximum.
TTrue
FFalse
Answer: False
Total benefit keeps rising as long as marginal benefit is positive. Net benefit peaks earlier, where marginal benefit falls to equal marginal cost. Doing more beyond that point still adds some benefit but adds more cost.
Question 4 Short Answer
Why does the rule 'expand an activity until marginal benefit equals marginal cost' give the same answer as comparing net benefit at every possible quantity?
Think about your answer, then reveal below.
Model answer: Net benefit changes by MB minus MC with each additional unit. While MB exceeds MC, each unit raises net benefit; once MC exceeds MB, each unit lowers it. So net benefit is highest at the point where MB stops exceeding MC.
The marginal rule is a shortcut for the total comparison. It works because the change in a total is the sum of the marginal changes.