Marginal Cost and Marginal Benefit
Santa is starting a new business where he sells Snowboards and Sleds. When he hires an addititional Elf they cost $25
One Elf can produce 5 sleds and 5 snowboards
A snowboard costs $2.
A sled costs $2.
Each Elf has a Marginal Benefit of $20 and the Marginal Cost is $25
The business does not succeed because the Marginal Cost is greater than the Marginal Benefit so the business looses Money.
Santa wanted to make a profit so he raised the price of the Snowboard and the Sled.
New price for Snowboard = $5
New price for Sled = $4
Each elf has a Marginal Benefit of $45 and a Marginal Cost of $25 making a profit of $20.
Since the Marginal Benefit is greater than the Marginal Cost the business was able to stay open and make a Profit
Marginal Benefit: The Benefit of an additional increment or worker
Marginal Cost: The Cost of an additional increment or unit
By: Nick Betschart