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On a graph the optimal level of activity is where
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the difference between total benefits and total costs is the greatest
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marginal cost equation
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MC=ΔTC/ΔA
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Optimal level of the activity
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when MB=MC
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marginal analysis
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Analytical technique for solving optimization problems that involves changing values of choice variables by small amounts to see if the objective function can be further improved
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When should a decision-maker using an unconstrained maximization problem increase the activity?
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when MB>MC
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When should a decision maker using an unconstrained maximization problem decrease the activity?
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when MB<MC
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In an unconstrained maximization problem with a discrete choice variable, the optimal level of activity is the last level for which
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Marginal benefit exceeds marginal cost (MB>MC)
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Net Benefit
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The difference between total benefits and total costs.
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What should be ignored in optimization problems
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sunk costs and fixed costs
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The optimal level of an activity is one that
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Maximizes net benefits
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Marginal benefits
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change in total benefit caused by change in level of an activity.
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Decision maker chooses the activity with the
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highest marginal benefit per dollar spent
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When MB=MC
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optimal level of activity has been met
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Constrained optimization
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Managers must choose the levels of two or more activities in order to maximize a TB function
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The total cost function can be minimized as long as
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the marginal benefit per dollar spent for all activities are equal
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Examples of choosing the activity with the highest marginal benefit per dollar spent include:
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buying a char with the highest safety rating at the same price as all other models. Choosing the photocopier that produces a higher number of sheets per monthly rental
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A decision maker will solve a constrained optimization problem by choosing the levels of the activities such that
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the marginal benefit per dollar spent for each activity is the same.
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constrained minimization problem
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involve minimizing total cost function (objective function) subject to a constraint that the levels of activities be chosen such that a given level of total benefit is achieved
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