Question

5. Suppose you can hire a mechanic to work on your car for up to six hours. MC I MBİ NIC ; 6 0 Hours (H) Hours (H) (a) Suppose the marginal benefit and marginal cost curves for your car repair decision are as shown in the figure on the left. What is the choice that maximizes your net benefit? (b) Suppose the marginal benefit and marginal cost curves for your car repair decision are as shown in the figure on the right. What is the choice that maximizes your net benefit?

Answer 1

Solution:

(a) Area under the MC curve gives total cost and area under MB curve gives total benefit. The difference between total benefit and total cost gives net benefit. Since total cost is more than the total benefit, the choice should be zero hours. This is the case of minimisation of loss.

(b) As we move from 0 to 6 hours, the area enclosing marginal benefit and marginal cost curves is increasing. This means the net benefit is increasing. Hence, optimal choice is 6 hours.