1. Chapter One Homeworkdue tomorrow in lab Numbers 10, 12 and 17

2. Managerial Economics & Business Strategy Chapter 1 The Fundamentals of Managerial Economics

3. Net Benefits • Net Benefits = Total Benefits - Total Costs • Profits = Revenue - Costs

4. Marginal Benefit (MB) • Change in total benefits arising from a change in the control variable, Q: • Slope (first derivative) of the total benefit curve.

5. Marginal Cost (MC) • Change in total costs arising from a change in the control variable, Q: • Slope (first derivative) of the total cost curve

6. Marginal Principle • To maximize net benefits MB = MC. • MB > MCmeans the last unit of the control variable increased benefits more than it increased costs. • MB < MCmeans the last unit of the control variable increased costs more than it increased benefits. • Can we do it??? Start with a control variable that can only be used in WHOLE units (discrete)

12. Q What if we can use fractional parts of the control variable? Total Benefits & Total Costs Costs Benefits Slope =MB B Slope = MC C Q*

13. Let’s talk calculus… • What is the MB? • 300-12Y • What is the MC? • 8Y • What is the profit max level of Y? • 300-12Y = 8Y • 300=20Y • Y=15 • What are the Net Benefits at this level of Y? • NB = ((300*15)-(6*15^2))-(4*15^2) • NB = 2250

14. One more check….Is it a maximum point?? • Second derivative of the Net Benefit equation must be negative • N(Y) = B(Y)-C(Y) • First derivative • (300-12Y)-8Y • Second derivative • -12-8= -20 • Negative  Maximum • Shows • N(Y) is concave • Slope of MB curve < slope of MC curve