If the marginal total cost when moving from Option A to Option B is negative and the marginal total cost when moving from Option B to A is positive, which of the two options is better? What is the underlying principal behind the decision?
What will be an ideal response?
A negative marginal total cost implies that the decision maker is gaining from the switch between options. A positive marginal cost implies that the decision maker is losing from the switch between options. In this case, moving to Option B makes the decision maker better off, while moving away from it makes the decision maker worse off. Hence, Option B is better of the two. The underlying principal behind this decision is referred to as the Principal of Optimization at the Margin.
You might also like to view...
If people increase their rate of time preference
A) more credit is made available in the banking system. B) less credit is made available in the banking system. C) the demand for credit shifts left. D) the supply of credit shifts right.
The coupon rate is equal to the annual coupon payment
A) divided by the face value of the bond. B) divided by the price paid for the bond. C) multiplied by the price paid for the bond. D) divided by the current market value of the bond.