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marginal analysis

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1. Suppose that a given set of resources can be used to make either handbags or wallets. The MC of a handbag is $19 and the MC of a wallet is $10. If the MU of a wallet is $10 and the MU of a handbag is $30, what can be done to improve resource allocation? What can you say about the gain to customers?

2. Using marginal analysis briefly and concisely explain how the profit-making firm's decision about how much to spend on innovation is made. (Use what you've learned about optimal decision making to help you in your description. (looking mainly for one specific point regarding maximization.)

Thanks in advance for your assistance.

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Solution Preview

1. Resource allocation is efficient when MUx/MUy = MCx/MCy
Here, MUx/MUy = 30/10 = 3
MCx/MCy = 19/10 = 1.9. Clearly, the ratio of marginal costs should be increased from 1.9 to 3 in ...

Solution Summary

This job applies marginal analysis.

$2.19