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In using marginal analysis to make optimal decisions, will you consider using information about such things...

In using marginal analysis to make optimal decisions, will you consider using information about such things as fixed costs, sunk costs, or average costs in the decision-making process? Explain why you would, or why would not, and what other information is required to make an optimal decision?

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Answer #1

Marginal analysis uses the concept of marginal cost and marginal revenue. marginal cost is the additional cost that is incurred by the firm when it produces one more unit. Marginal revenue is the additional revenue received from selling the same unit of output. Production is done at an optimum level when the marginal cost of producing a given unit becomes equal to the marginal revenue received from its sale. For optimum decision regarding the output level, marginal cost should be equal to marginal revenue and therefore, we only need information about marginal revenue and marginal cost. Fixed cost sunk cost and average cost are not used in determining the the profit-maximizing level of output.

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