Marginal benefit represents the value of the additional utility gained from the consumption of an additional unit of a good or service. Spill crises have led both the United States and the European Union to tighten up their regulations of oil tankers. We will also develop another tool to use in interpreting marginal benefit and cost curves. Ms. Phan’s marginal benefit curves for studying typify a general phenomenon in economics. Maximum net benefits are found where the marginal benefit curve intersects the marginal cost curve at activity level D. Panel (b) shows that if the level of the activity is restricted to activity level E, net benefits are reduced from the light-green shaded triangle ABC in Panel (a) to the smaller area ABGF. We can use marginal benefit and marginal cost curves to show the total benefit, the total cost, and the net benefit of an activity. Their areas would still equal the total benefit and total cost of study, and the sum of those areas would be closer to the area under the curves. It also required double-hulled tankers for shipping oil. – A visual guide Given that there was a total of 824,921 gallons of oil actually spilled in 1981, should the Coast Guard have attempted to prevent even more spillage? The 2002 breakup of the oil tanker Prestige off the coast of Spain resulted in the spillage of 3.2 million gallons of oil. The marginal cost is the amount by which an additional unit of an activity increases its total cost. Maximum net benefits are found where the marginal benefit curve intersects the marginal cost curve at activity level D. Panel (b) shows that if the level of the activity is restricted to activity level E, net benefits are reduced from the light-green shaded triangle ABC in Panel (a) to the smaller area ABGF. We assume that a consumer seeks the greatest satisfaction possible within the limits of his or her income or budget. We can say that the marginal cost of the first hour spent studying economics is zero. Now compute the marginal benefits and costs of hours devoted to studying economics, completing the table below. This is known as the marginal utility of expenditure on each item of good. First, note that the sum of the areas of the five rectangles, 50 points, equals the total benefit of 5 hours of study given in the table in Panel (a) of Figure 6.1 “The Benefits of Studying Economics”. There is, of course, no virtue in an oil spill. That is a cost few people would accept. We can apply the marginal decision rule to the problem in Figure 6.6 “Using Marginal Benefit and Marginal Cost Curves to Determine Net Benefit” in another way. Panel (b) shows the marginal cost curve from Figure 6.3 “The Marginal Benefits and Marginal Costs of Studying Economics”. At this quantity, the net benefit of the activity is maximized. She expects studying economics will add somewhat less to her score, and she expects studying accounting will add more. The total benefit of 2 hours of study equals the sum of the areas of the first two rectangles, 32 points. But it is certainly the case that students have a rough idea of the likely payoff of study time in different subjects. Suppose, instead of thinking in intervals of whole hours, we think in terms of smaller intervals, say, of 12 minutes. Just as marginal benefit curves generally slope downward, marginal cost curves generally slope upward, as does the one in Figure 6.3 “The Marginal Benefits and Marginal Costs of Studying Economics”. Thus, the total benefit of 2 hours of study equals 32 points, the sum of the areas of the first two rectangles. Net benefit is maximized at the point at which marginal benefit equals marginal cost. This same value equals the area of the rectangle bounded by 0 and 1 hour of study and the marginal benefit of 18. Si… We assume that given these benefits and costs, consumers and firms will make choices that maximize the net benefit of each activity—the total benefit of the activity minus its opportunity cost. The area under the marginal cost curve between D and J gives the total cost of increasing study time; it is DCHJ. Now look at the third row in the table in Panel (a). The change in her expectations reduced the benefit and increased the cost of studying economics. The forgone net benefits, or deadweight loss, is given by the purple-shaded area FGC. It increased shipper liability from $14 million to $100 million. The marginal decision rule forms the foundation for the structure economists use to analyze all choices. The assumption of maximizing behavior lies at the heart of economic analysis. They merely assume that people act as if they did. Shifting that hour to economics would cost nothing. If the activity level is increased from D to J, as shown in Panel (c), net benefits declined by the deadweight loss measured by the area CHI. When the increments used to measure time allocated to studying economics are made smaller, in this case 12 minutes instead of whole hours, the area under the marginal benefit curve is closer to the total benefit of studying that amount of time. For example, the total benefit curve in Panel (b) tells us that, when Ms. Phan increases her time studying for the economics exam from 2 hours to 3 hours, her total benefit rises from 32 points to 42 points. Looking at the rectangles in Panel (b) over the range of 0 to 5 hours of study, we see that the areas of the five rectangles total 32, the total cost of spending all 5 hours studying economics. You will pay more to supersize your McDonald’s order; the firm’s labor costs will rise when it hires another worker. Figure 6.4 The Benefits and Costs of Studying Economics. Sources: Mark A. Cohen, “The Costs and Benefits of Oil Spill Prevention and Enforcement,” Journal of Environmental Economics and Management 13(2) (June 1986): 167–188; Rick S. Kurtz, “Coastal Oil Pollution: Spills, Crisis, and Policy Change,” Review of Policy Research, 21(2) (March 2004): 201–219; David S. Savage, “Justices Slash Exxon Valdez Verdict,” Los Angeles Times, June 26, 2008, p. A1; and Edwin Unsworth, “Europe Gets Tougher on Aging Oil Tankers,” Business Insurance, 36(48) (December 2, 2002): 33–34. On a given day, the first hour spent studying a certain subject probably generates a greater marginal benefit than the second, and the second hour probably generates a greater marginal benefit than the third. Marginal benefit is the benefit: A. that arises from the secondary effects of an activity. Should a firm hire one more worker? We interpret the expected total gain in her score as the total benefit of study. For purposes of our model, we can imagine that the intervals are as small as we like. Figure 6.3 “The Marginal Benefits and Marginal Costs of Studying Economics” also shows the marginal benefit curve for studying economics that we derived in Panel (b) of Figure 6.1 “The Benefits of Studying Economics”. Suppose a college student, Laurie Phan, faces two midterms tomorrow, one in economics and another in accounting. Contribution margin Contribution Margin Ratio The Contribution Margin Ratio is a company's revenue, minus variable costs, divided by its revenue.