Answer to Question #108942 in Economics of Enterprise for gaurav

Question

Assume that you have to determine the optimal amount of workers (L) that need to be hired in a
factory. The Marginal Benefit to the factory is approximately given by the expression:
MB = 100,000 - L.
The Marginal Cost to the firm is approximately given by the expression:
MC = 10,000 + L
2
.
a) Explain in your own words the Marginal Approach. How do you make a decision using this
approach?
b) Why the model has the Marginal Benefit as decreasing?
c) Why the model has the Marginal Cost increasing at an increasing rate?
d) Calculate the optimal of Labour using the Marginal Approach.

e) Make a well labelled diagram that illustrates your solution.
f) What can be some of the limitations of the Marginal Approach? What other solutions or
approaches can you use to determine how many workers you need to hire?

Answer 1

Marginal approach is the technique where additional benefit of an activity compared to the additional cost.Marginal approach maximazises billing companies at the expenses of group expenses.

b)As a consumption level increases marginal benefit decreases because the incremental amount of satisfaction associaated with additional consumption decreases.Thus the marginal benefit experienced by a consumer is hiegest for the first unit of consumption and declines thereafter.

c)The marginal cost is increasing at an increasing rate because as the output increases ,the total cost as well the variable cost increase.

d)Optimal labour

$$M_C=M_B$$

$$100000-L=10000+L$$

$$90000=2L$$

$$L=45000$$

e)Limitations of marginal approach

-Difficulty in analysis .It may be very difficult in practise to segregate all cost into fixed and variable cost .

-The technique of marginal approach is difficult to apply in industries like ship building ,where the value of work in progress is large in proportion to turnover.

f)An alternative is absorption costing which allocates fixed ,overhead cost to each product.