The MBA Math Monday series helps prospective MBA students to self assess their proficiency with the quantitative building blocks of the MBA first year curriculum.
Marginal analysis yields insight into the optimal production quantity, and corresponding profit, by examining whether each additional quantity sold generates more revenue than it costs to produce. Many students new, or newly returned, to economics have trouble applying this simple concept, usually much to their own surprise and frustration.
Marginal analysis serves as a great introduction to how economics can be presented with data, formulas, and charts. Beginning students typically find one or two of these approaches intuitive but struggle with the other(s), finding it hard to accept that they are equivalent.
This exercise presents a simple table-based exercise whose solution will be presented from both total and marginal perspectives. We’ll revisit marginal analysis with formulas and calculus in subsequent MBA Math Monday sample exercises.
Exercise:
Global Corp. sells its output at the market price of $13 per unit. Each plant has the costs shown below:
|
Units of Output |
Total Cost ($) |
|
0 |
6 |
|
1 |
9 |
|
2 |
15 |
|
3 |
24 |
|
4 |
36 |
|
5 |
51 |
|
6 |
69 |
|
7 |
90 |
How much output should each plant produce?
Solution (with audio commentary): click here
Prof. Peter Regan created the self-paced, online MBA Math quantitative skills course and teaches live MBA courses at Dartmouth (Tuck), Duke (Fuqua), and Cornell (Johnson).