Chapter 3: Concepts/ Theory Flashcards
Maximization problem+ general rule
the decision maker wants to maximize an objective function
usually for measuring a benefit
Minimization problem+ general rule
the decision maker wants to minimize an objective function
usually for measuring a cost
Unconstrained optimization
the decision maker can choose the level of activity from an unrestrained set of values
Constrained optimization
the decision maker can choose values for the choice variables from a restricted set of values
Choice variables
determine the value of the objective function
discrete: countable number values
continuous: any value between two end points
Net benefit+ equation
the objective function to be maximized
NB= total benefit minus total cost
Optimal level of activity (A*)
level of activity that produces a net benefit
Marginal benefit (MB)+ equation
change in total benefit (TB) caused by an incremental change in the level of activity
MB= change in TB/ change in A
Marginal cost (MC)+ equation
change in total cost (TC) caused by an incremental change in the level of activity
MC= change in TC/ change in A
How are MB and MC measured on a graph?
with the slope of the tangent line from the point on the curve
When is a level of activity optimal?
when no further increases in NB are possible for any changes in the activity, where MB=MC
Sunk costs
costs previously paid that cannot be reversed
Fixed costs
costs that are constant and must be paid regardless of the level of activity chosen
Average (unit) cost+ equation
cost per unit of activity
TC/ number of units of activity
What should decision-makers do when wishing to maximize net benefit?
ignore any sunk costs, fixes costs, or average costs associated with the activity
