- Based on the passage, which of the following events would most likely cause the company to change its mind and launch the game by spending the extra $1 million?
Answer: A new market analysis suggests that with the extra $1 million in advertising, the game will generate $1.2 million in revenue.
The decision at the margin ignores sunk costs (the $5 million already spent). The marginal decision is: should we spend $1 million more (marginal cost) to get $800,000 back (marginal benefit)? Initially, the answer is no (MC > MB). The decision would change if the marginal benefit were to rise above the marginal cost. Option B presents this exact scenario: the new projected revenue (marginal benefit) is now $1.2 million, which is greater than the additional advertising cost (marginal cost) of $1 million. A and C are incorrect because they focus on the $5 million sunk cost, which is a common decision-making fallacy. D is irrelevant to the profitability of this specific project at the margin.
- A coffee shop currently closes at 6 p.m. The owner calculates that if they stay open for an additional hour, they will serve five more customers, generating $25 in revenue. The cost of labor and electricity for that hour is $30. The owner decides to maintain the 6 p.m. closing time. Which of the following changes would be least likely to alter the owner's decision at the margin?
Answer: The shop's landlord announces a 10% reduction in the monthly rent, effective immediately.
The decision is based on comparing marginal revenue ($25) to marginal cost ($30). The decision will change if MR rises or MC falls. Rent (B) is a fixed cost, not a marginal cost. A reduction in rent lowers the average total cost but does not affect the cost of staying open one more hour, so it is the least likely to change the decision. A would increase marginal revenue. C would decrease the marginal cost of labor. D would decrease the marginal cost of goods sold for that hour. All three would make staying open more attractive.
- A firm is considering investing in a new marketing campaign. The marginal cost of the campaign is $50,000. The firm's analysts are uncertain about the outcome, projecting that the marginal revenue could be anywhere from $40,000 to $80,000. The firm decides to proceed with the campaign. What does this decision imply about the firm's attitude toward risk?
Answer: The firm is risk-neutral or risk-seeking, as the expected marginal benefit is likely at or above the marginal cost.
The decision to proceed means the firm believes the expected marginal benefit is at least $50,000. The midpoint of the projected revenue range is $60,000 (($40k + $80k) / 2). If the firm is risk-neutral, it would proceed as long as the expected benefit ($60,000) exceeds the cost ($50,000). If the firm is risk-seeking, it would be even more willing to take the gamble. A risk-averse firm, however, would weigh the potential loss more heavily and might not proceed even if the expected value is positive. Therefore, the decision suggests the firm is not strongly risk-averse. A is a contradiction. C is a possibility but not the best economic explanation. D is incorrect; rational decisions under uncertainty are based on expected values, not worst-case scenarios.
- A consumer subscribes to three streaming services. They consider adding a fourth service but decide against it, as the monthly fee for the fourth service is greater than the enjoyment they expect to get from it. Which of the following would most likely cause the consumer to cancel one of their existing subscriptions rather than add a new one?
Answer: The price of their preferred streaming service increases significantly.
This question asks what triggers a marginal change in the opposite direction (reducing consumption). The consumer keeps a service as long as its marginal benefit (enjoyment) is greater than or equal to its marginal cost (price). If the price of one service (A) increases significantly, its marginal cost now likely exceeds its marginal benefit, triggering a decision to cancel that specific service. This is a direct application of marginal analysis. B might cause them to substitute, but not necessarily cancel one. C is a plausible reason to cut back, but A provides a specific marginal calculation that has changed for one of the three services. D might cause them to cancel one, but since the price of their preferred service (implying highest marginal benefit) goes up in option A, it creates a clearer case for re-evaluation and potential cancellation than a small increase across the board.
- A city council voted against funding the installation of a fifth traffic light on a busy street, arguing that the cost of $100,000 was not justified by the minor safety improvement it would provide over the existing four lights. Which development would be most likely to cause the council to change its decision at the margin?
Answer: A new federal program offers to cover 50% of the installation cost for new traffic safety devices.
The council's decision is a comparison of the marginal cost ($100,000) and the marginal benefit (minor safety improvement). The choice changes if the marginal cost decreases or the marginal benefit increases. Option B directly cuts the marginal cost to the city in half (from $100,000 to $50,000). This significant decrease in the marginal cost could make the marginal benefit of the fifth light seem worthwhile. A refers to a sunk cost, which is irrelevant to the future decision. C suggests the marginal benefit might be lower than expected or even negative. D increases the total budget but doesn't change the specific cost-benefit analysis of the fifth traffic light.
- A government agency is funding a research project. They have spent $10 million of a $12 million budget. An assessment reveals the project is unlikely to succeed. The agency decides to cut its losses and cancel the project, forgoing the final $2 million. What new information would most likely cause them to reverse this decision and spend the final $2 million?
Answer: The lead scientists present a revised plan showing a high probability of a partial breakthrough if the final $2 million is spent.
The $10 million is a sunk cost and irrelevant to the decision. The marginal decision is whether to spend the final $2 million (marginal cost). The initial decision to cancel implies the expected marginal benefit is less than $2 million. To reverse this, the expected marginal benefit must increase. Option C describes this: the new plan increases the expected benefit from spending the next $2 million, making it potentially worthwhile. A refers to past sunk costs, which is a fallacy. B might increase the incentive, but it doesn't directly change the expected value of the project itself. D is irrelevant to the cost-benefit analysis of this specific project's final stage.
- A software company is deciding whether to hire a tenth programmer. After analyzing the costs and expected productivity, the management team decides against it, concluding the cost of the tenth programmer exceeds their expected contribution to revenue. A week later, they reverse their decision and hire the tenth programmer. Which of the following provides the best marginal explanation for this change?
Answer: The company secured a new, large client project requiring additional labor to meet the deadline.
The initial decision was that the marginal cost (salary of the 10th programmer) was greater than the marginal revenue product (their contribution to revenue). The decision changed because the marginal benefit of that programmer increased. Securing a new, large project (C) directly increases the revenue that an additional programmer can help generate, raising their marginal revenue product, likely above their marginal cost. B explains why the marginal cost (wage) might decrease, which is a plausible reason for the change, but an increase in labor supply doesn't guarantee the company can hire someone for less. C provides a direct impact on the marginal benefit side of the equation for the firm. A relates to total profit, not the marginal contribution of the next hire. D is about average salary, which is less relevant than the specific salary the company must pay for the tenth hire.
- A student has studied for an exam for three hours and is considering studying for a fourth. They decide against it, preferring to spend the time relaxing. This indicates that at the third hour, the marginal benefit of studying...
Answer: was equal to its marginal cost, and for the fourth hour, the marginal benefit is expected to be lower than its marginal cost.
Rational decision-making at the margin involves continuing an activity as long as marginal benefit (MB) exceeds or equals marginal cost (MC). The student stops after the third hour and chooses not to study for the fourth. This implies the decision for the fourth hour is that MB < MC (the benefit of a better grade is less than the benefit of relaxing). The optimal point was likely at three hours, where MB was approximately equal to MC. A correctly identifies this relationship for the fourth hour. B is an exaggeration; MB is likely positive but small, not negative. C confuses marginal and total benefit. D confuses marginal and average benefit; decisions are made based on marginal, not average, values.
- A consumer enjoys buying comic books and has purchased four this month. They decide not to purchase a fifth comic book because the enjoyment they would get from it is less than the price. Which of the following events would most likely cause this consumer to change their decision and purchase the fifth comic book?
Answer: The publisher releases a surprise issue featuring the consumer's favorite character.
The consumer's decision is based on comparing the marginal benefit (enjoyment of the fifth book) to the marginal cost (its price). The decision changes if either the marginal benefit increases or the marginal cost decreases. Option D describes an event that would significantly increase the marginal benefit of the fifth book, making it more likely to exceed the price. A: The average price is irrelevant to the marginal decision of buying the next one. B: A sale next month would likely decrease, not increase, the incentive to buy the fifth book this month. C: While an income increase might lead to more comic book purchases eventually, it doesn't directly change the marginal benefit of the specific fifth issue compared to its price at the moment of decision.
- A restaurant owner keeps her business open from 8 a.m. to 9 p.m. She considers staying open until 10 p.m., but decides against it because the projected revenue from the extra hour is less than the costs of labor and utilities for that hour. If she later decides to stay open until 10 p.m., which of the following is the most likely reason?
Answer: A new late-night bus route begins operation with a stop directly in front of her restaurant.
The decision to stay open for an extra hour is a marginal one. The owner compares the marginal revenue (revenue from 9 to 10 p.m.) with the marginal costs (labor, utilities for that hour). The decision changes if the marginal revenue increases or marginal costs decrease. A new bus stop (B) would likely increase the number of potential customers during that late hour, thus increasing the marginal revenue and potentially making it profitable. A is incorrect because fixed costs are not part of the marginal cost of staying open one more hour. C is incorrect because decisions are made at the margin, not based on averages. D might increase her overall business, but it doesn't specifically guarantee that the 9-10 p.m. hour will become profitable.
- A manufacturing plant runs two shifts, producing 100 units per shift. Management considers adding a third, overnight shift. They calculate that due to higher wage requirements and lower efficiency, the marginal cost of production for the third shift would be higher than the product's selling price. They decide against it. What new circumstance would most plausibly change this marginal decision?
Answer: A large, one-time rush order is received that carries a penalty for late delivery.
The initial decision is that for the third shift, MC > MR (price). To change this, MC must fall or MR must rise. A rush order with a penalty (B) effectively increases the marginal revenue of production. The benefit of running the third shift is not just the selling price of the units, but also the avoidance of the late penalty. This added benefit could raise the total MR above the MC for the third shift. A and D affect average cost and productivity on other shifts, not the marginal cost of the third shift. C lowers the marginal cost, but a large penalty (a significant increase in MR) is a more direct and powerful reason for a firm to undertake production that would otherwise be unprofitable at the margin.
- A consumer is choosing between buying an additional apple or an additional banana. The price of an apple is $2 and the price of a banana is $1. The consumer, having already consumed some of each, chooses to buy the banana. They later change their mind and decide to purchase the apple instead. Which of the following, assuming prices have not changed, would best explain this change in choice?
Answer: The consumer realizes that the marginal utility per dollar for the apple is now higher than for the banana.
Rational consumers allocate their budget to maximize utility by comparing the marginal utility per dollar (MU/P) for different goods. Initially, the consumer chose the banana, implying MU_banana / $1 > MU_apple / $2. To change their mind and choose the apple, the inequality must reverse: MU_apple / $2 > MU_banana / $1. Option C states this condition directly. Option B is plausible, but C is more precise because the decision explicitly relies on the utility relative to the price. It's possible for the MU of the apple to rise and the MU of the banana to fall, but the choice only flips if their price-adjusted values change their relative ranking. A refers to total, not marginal, utility. D would affect the choice, but it doesn't describe the immediate condition for choosing the apple over the banana.
- A student downloads five songs from a new album and listens to them. They have the option to download a sixth song for $0.99 but choose not to, feeling they have enough new music. This decision implies that the marginal utility of the sixth song is less than the utility of the $0.99. If the price of a different, preferred artist's new album drops from $10 to $5, how might this influence the student's original decision?
Answer: It would increase the opportunity cost of spending $0.99 on the sixth song, reinforcing the decision not to buy it.
This question tests how a change in the price of a substitute good affects a marginal decision. The preferred album is a substitute for the single song. When the price of the substitute falls, it becomes a more attractive use of the student's money. This increases the opportunity cost of buying the sixth song. The student could now put that $0.99 toward a much cheaper, preferred album. This higher opportunity cost (a form of marginal cost) makes the student even less likely to buy the single song. A is incorrect because the price change of a different product doesn't change the inherent utility of the song itself. B is a very minor income effect and less significant than the substitution effect described in D. C is incorrect because consumption choices are interdependent.
- A freelance writer accepts a project that pays $50 per hour. She decides to work 20 hours per week on this project, valuing her 21st hour of leisure more than $50. The client then offers a bonus, raising the pay for every hour worked beyond 20 to $75. How does this change the writer's marginal decision?
Answer: The marginal benefit of working the 21st hour increases, making it more likely she will work that hour.
The writer's decision is a comparison between the marginal benefit of working an additional hour (the wage) and the marginal cost (the value of the forgone leisure). Initially, for the 21st hour, MB ($50) < MC (value of leisure). The bonus structure changes the marginal benefit for the 21st hour from $50 to $75. As stated in B, this increase in marginal benefit makes it more likely that it will now exceed the marginal cost, causing her to change her choice and work the extra hour. A has the opportunity cost change reversed. C discusses average pay, which is not the basis for the marginal decision. D incorrectly assumes the marginal cost changes, when it is the marginal benefit that is directly affected by the pay increase.
- A car manufacturer is producing 1,000 cars per week. The marginal cost to produce the 1,001st car is $20,000, and the car sells for $22,000. The company decides to increase production. However, it chooses not to increase production to 1,002 cars per week. This decision implies that the company estimates the marginal cost of the 1,002nd car to be...
Answer: greater than or equal to $22,000.
A firm produces an additional unit as long as the marginal revenue (MR) from that unit is greater than or equal to its marginal cost (MC). Here, the price is the marginal revenue ($22,000). The firm produces the 1,001st car because its MR ($22,000) > MC ($20,000). The decision to not produce the 1,002nd car means the firm believes the profit condition will no longer hold for that unit. Therefore, they must estimate that the MC of the 1,002nd car will be greater than or equal to the MR of $22,000. This reflects the principle of rising marginal costs in the short run.
- An airline is selling seats on a flight. Ten seats are empty just before takeoff. The full ticket price is $400, and the average cost per passenger for the flight (including fuel, crew salaries, and airport fees) is $300. The airline decides not to offer any last-minute discounted tickets. What marginal calculation best explains this decision?
Answer: The airline believes offering discounts will lower the price that future full-fare passengers are willing to pay.
The marginal physical cost of adding one more passenger to a plane with empty seats is very low (perhaps just a snack and a drink). The decision not to sell a cheap ticket is not based on this immediate marginal cost. Instead, it's a strategic decision where the long-run marginal cost includes the expected loss of revenue from future customers who will delay booking to get a discount. Option B correctly identifies this. The airline perceives the marginal cost of the discounted ticket as the forgone revenue from future full-fare passengers, and this perceived marginal cost is higher than the marginal benefit of the discounted ticket's price. A is incorrect, as the immediate marginal cost is very low. C is incorrect because decisions should not be based on average cost. D is irrelevant to the marginal decision of selling one more seat.
- A movie theater is half-full for a particular showtime. The manager decides not to lower ticket prices to attract more viewers, reasoning that it would devalue the tickets for future shows. An hour later, the manager changes their mind and announces a 50% discount for the remaining seats. This change in decision-making at the margin is best explained by:
Answer: The manager's assessment of the long-term marginal cost (lost future revenue) decreased relative to the short-term marginal benefit.
This is a multi-step marginal analysis. The marginal cost of a discount has two parts: the immediate low cost of seating a person, and the long-term cost of training customers to wait for discounts. Initially, the manager felt this long-term MC was higher than the MB of a discounted ticket. As showtime nears, the chance to sell a full-price ticket disappears, and the certainty of an empty seat (zero revenue) becomes concrete. The marginal benefit of getting some revenue from the seat rises in importance, while the long-term cost seems less significant compared to the immediate gain. C captures this shift in the perceived balance between long-term marginal cost and short-term marginal benefit. A is wrong; the physical marginal cost is always low. B is phrased confusingly; the opportunity cost of an empty seat increases as it becomes certain it will remain empty. D is about total revenue, not the marginal decision for the next ticket.
- Due to diminishing returns, the marginal benefit a person gets from each additional hour of sleep per night decreases. A person currently sleeps for 7 hours and is considering sleeping for an 8th hour. They choose not to, deciding the benefit of that extra hour is not worth missing their morning workout. Which of the following would most likely cause them to change their mind and sleep for the 8th hour?
Answer: Their gym announces it will be closed for renovations the next morning.
The decision is a comparison between the marginal benefit of the 8th hour of sleep and its marginal cost (the forgone workout). The person's choice changes if MB rises or MC falls. The gym being closed (B) completely eliminates the marginal cost (the opportunity to work out), making it almost certain that the person will now choose the 8th hour of sleep, as its benefit is now compared to a much lower cost (e.g., just lying in bed). A confirms the initial decision. C increases total benefit but not necessarily the marginal benefit of the 8th hour relative to the workout. D refers to an average and is irrelevant to this individual's marginal choice.
- A firm is polluting a river and has the option to install scrubbers to reduce emissions. Installing the first scrubber has a low marginal cost and high marginal benefit (removes the most harmful pollutants). Each additional scrubber has a higher marginal cost and a lower marginal benefit. The firm installs three scrubbers and decides against installing a fourth. Why might a new government regulation cause the firm to install the fourth scrubber?
Answer: The regulation imposes a per-unit tax on the remaining pollution the firm emits.
The firm stopped at three scrubbers because the marginal cost of the fourth was greater than its marginal benefit. The decision changes if MC falls or MB rises. A tax on remaining pollution (B) effectively increases the marginal benefit of abatement. By installing the fourth scrubber, the firm avoids paying the tax on the pollution it would have removed. This new 'avoided cost' adds to the marginal benefit, potentially making it greater than the marginal cost. A is a command-and-control regulation, not a marginal decision. C is a lump-sum subsidy, which doesn't affect the marginal cost of the fourth scrubber. D would mean there's no need for a fourth scrubber at all.
- A farmer is currently using 100 pounds of fertilizer on a field and decides not to add an additional 10 pounds. According to marginal analysis, what would cause the farmer to reverse this decision?
Answer: The price of fertilizer falls, and the market price for the farmer's crop rises.
The farmer's decision not to add more fertilizer means the marginal cost of the extra 10 pounds (the price of the fertilizer) is greater than the marginal benefit (the value of the extra crop yield it would produce). To change this decision, the marginal cost must fall or the marginal benefit must rise. Option B describes both of these changes: the price of fertilizer (marginal cost) falls, and the market price of the crop (which determines the value of the extra yield, i.e., the marginal benefit) rises. A is about total yield, not the marginal yield from the next 10 pounds. C refers to an average, which is not relevant to this specific field's marginal decision. D describes a sunk cost, which is irrelevant to the decision of whether to add more fertilizer.
