Question

Suppose you are given a $100 gift card and you choose to spend it on a number of goods. You will select a combination of goods that is best for you and that maximizes your satisfaction. Your choices will involve which of the following?.

Answer 1

Your choices will involve the comparison of marginal cost and marginal benefits for each good considered.

What is marginal cost and marginal benefit?

Marginal cost is the additional cost generated by purchasing an extra unit of a good.  For example, if the cost of buying 10 units of a good is 100 and the total cost of buying 12 units is 120. Marginal cost is: (120 - 100) / (12 - 10) = 10

Marginal benefit is the change in total benefit as consumption is increased by one unit. Satisfaction is maximised when marginal cost is equal to marginal benefit.

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