becon chapt 3

Marginal Net Benefit

•Increase activity if MB > MC •Decrease activity if MB < MC •Optimal level of activity-Last level for which MB exceeds MC

choice variables (discrete vs continuous)

determine the value of the objective function discrete: Can only take specific integer values continuous: Can take any value between two end points

Unconstrained Optimization Problems

optimization problem in which the decision maker can choose the level of activity from an unrestricted set of values

Fixed and Sunk Costs

sunk: Previously paid & cannot be recovered fixed:Constant & must be paid no matter the level of activity

Constrained Optimization Problems

An optimization problem in which the decision maker chooses values for the choice variables from a restricted set of values The ratio MB/P represents the additional benefit per additional dollar spent on the activity (bang per buck)

marginal analysis

Analytical techniques for solving optimization problems that involves changing values of choice variables by small amounts to see if the objective function can be further improved

Marginal Benefit

Change in total benefit (TB) caused by an incremental change in the level of the activity •MB = ∆TB/∆A

Marginal Cost

Change in total cost (TC) caused by an incremental change in the level of the activity •MC = ∆TC/ ∆A

Net Benefit

Difference between total benefit (TB) and total cost (TC) for the activity • NB = TB - TC •Optimal level of the activity (A*) is the level that maximizes net benefit •A is the choice variable that the decision maker adjusts so as to maximize the objective function

optimization involves specification of what 3 things?

Objective or goal function to be maximized or minimized •Activities or choice variables or decision variables that determine the value of the objective function •Any constraints that may restrict the values of the choice variables

Objective function

The function the decision maker seeks to maximize or minimize.

decision, activity variables

Variables that determine the value of the objective function. ex. value of profit depends on # units of output sold