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joshtatum92 joshtatum92
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A month ago
How does optimization using total value differ from optimization using marginal analysis? Assume that the city council has to choose one of the following three alternatives—setting up a school, setting up a hospital, and setting up a playground. The estimates of the expected cost and benefit of all three projects are shown in the following table. How does the city council arrive at the optimal choice if both the techniques of optimization are implemented? Do the results vary?

Project Cost ($)Benefit ($)
Playground15,00030,000
School20,00050,000
Hospital50,00075,000
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Macroeconomics


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Redhawt75Redhawt75
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The basic difference between the two techniques is that optimization using total value estimates the total net benefits of different alternatives before arriving at the optimum decision, whereas optimization using marginal analysis estimates the change in net benefits when the decision maker shifts from one alternative to another.
Net benefit of setting up a school = $50,000 − $20,000 = $30,000.
Net benefit of setting up a hospital = $75,000 − $50,000 = $25,000.
Net benefit of setting up a playground = $30,000 − $15,000 = $15,000.
Optimization using total value compares the net benefit of all alternatives before arriving at an optimum. The net benefit of setting up a school is the highest among all three alternatives, hence it is the optimum decision when optimizing using total value.
Optimization using marginal analysis compares the change in net benefit when switching from one alternative to another. If the city council chooses to set up a school over setting up a playground, the change in net benefit = $30,000 − $15,000 = $15,000. If the city council chooses to build a hospital over setting up a playground, change in net benefit = $25,000 − $15,000 = $10,000. Therefore, setting up a playground is not the optimum choice.
Instead of a hospital, if a school is built, change in net benefit = $30,000 − $25,000 = $5,000.
Because the change in net benefit when switching from hospital to school is positive, setting up a school is the better option of the two. Hence, setting up a school is the optimum decision among the three alternatives when optimizing using marginal analysis. Thus both optimization techniques suggest that building a school is the optimum choice.

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joshtatum92 Author
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A month ago
Smart ... Thanks!
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Yesterday
I appreciate what you did here, answered it right Smiling Face with Open Mouth
wrote...

2 hours ago
Good timing, thanks!
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