Question

Read this scenario and using appropriate terminology, answer the three questions below:

Scenario: "You are selling your 1996 Mustang. You have already spent $1,000 on repairs. At the last minute, the transmission dies.
You can pay $600 to have it repaired, or sell the car “as is.”

1. What is the marginal cost of fixing the transmission?
2. What is the marginal benefit of fixing the transmission if the Blue book value for the car is $6,000 if the transmission works, $5,500 if it doesn’t?
3. Is it worth fixing the transmission? Why or why not?

Answer 1

Marginal cost is the change in total cost when the quantity is changed by one unit.

Marginal cost of fixing the transmission =

= $  

Marginal benefit is the change in the total benefit or utility when consumption is changed by one unit.

Marginal benefit of fixing the transmission =

= $

Since, the marginal benefit is greater than marginal cost therefore it will be profitable to fix the transmission.