Question

Jelly Bean Production

100	$0.85
101	$0.86
102	$0.87
103	$0.88

 
Initially, you produce 100 boxes of jelly beans per time period. Then a new customer calls and places an additional order for jelly beans, requiring you to increase your output to 101 boxes. She offers you $1.75 for the additional box. Should you produce it?

 

Answer 1

To make a production decision at the margin, you need to know whether your additional revenue is greater than the cost of producing the additional unit. In other words, you need to make sure that marginal revenue > marginal cost.
 
In this situation, your marginal revenue is the $1.75 your customer is willing to pay. To calculate your marginal cost, first determine the total cost for your original 100 boxes: 100 boxes × $0.85 per box = $85.00 total cost. When you produce the 101st box, your total cost increases to: 101 boxes × $0.86 per box = $86.86 total cost. The marginal cost is $86.86 - $85.00, or $1.86.
 
Because the marginal cost of $1.86 is greater than the marginal revenue of $1.75, you should not produce the additional box.