# Marginal Value

Michael Anderson
John Christie

Concept Definition
The Marginal Value is an economic term also referred to as the Marginal Benefit and Marginal Revenue. It can refer to output, consumption, or other economic choice variable. The Marginal Value is the change in the total value created by the change in quantity of the control variable. As an example if the control variable Q increase from 1 to 2 and this causes the Value to increase from 50 to 70, the Marginal Value is the difference between the two values 70 - 50 = 20. The Marginal Value is 20.

The Marginal Value minus the Marginal Cost will equal the Marginal Net Benefits. The net benefits are maximized when the Marginal Value is the same as the Marginal Cost which makes the Marginal Net Benefit equal to zero.

Marginal Value can also have a functional relationship between two variables, one being a dependent variable and the other an independent variable. These variables can interact to show a variety of different relations including linear, exponential, ect.

Graphical Explanation of Marginal Value

The link below provides a graphical explanation of the decreasing marginal value for consuming candy bars. As shown, the first candy bar provide immediate total utility of 50. As more and more candy bars are consumed, total utility increases (blue line), however the marginal value (red line), or rate of increase in total utility decreases. In this instance, marginal value decreases because there is less satisfaction from consuming more and more candy bars. There are a variety of reasons why marginal value in this case would decrease. An individual could become full, have too high of a blood sugar from all the candy, or just become sick of the taste.

The following graphs also help to illustrate Marginal Value. As stated above marginal value will decrease in the future for multiple reasons and cost will increase into the future. The graph below illustrates this point. The second graph illustrates the gains and losses with marginal cost and marginal value. The gain will be the area above the marginal cost line and below the marginal value line. The losses will be the area above the marginal value but below the marginal cost line.

Sample Problems

Please see the data below listed by Bundle (letter), Oranges/week (#), Total Utility (#), and Marginal Utility (#)
 Bundle (letter) Oranges/week (#) Total Utility (#) Marginal Utility (#) A 0 50 0 B 3 115 15 C 5 133 8 D 6 139 6 E 9 147 1 F 10 147 0 G 13 147 0 H 15 147 0

1) The table data above provides George's marginal utility for consumption of oranges and income. Using the table above please calculate Marginal Value of oranges for consumption of 5 and 9 oranges/week. (Hint: the formula is MV(Oranges)=MU(oranges)/MU(Income).

Answer: consumption of 5 equals a MV of 16.63 for George and consumption of 9 equals a MV of 147 for George (133/8=16.63 and 147/1=147)

2) As George consumes more oranges, please explain why his MU decreases for increased consumption, but marginal value increases and then drops to zero.

Answer: As George consumes more oranges, he receives less utility satisfaction from the oranges. As far as marginal value, it is maximized at nine oranges and then drops to zero for subsequent oranges there after. This can be attributed to marginal utility reaching zero units even though George still has income, he receives no pleasure from eating oranges.

Multiple Choice Questions

1) James is weighing the costs and benefits of studying for his Economics final. Spring is in season, he wants to be outside with his friends. Also James feels as if he has worked hard to complete all the semester assignments in Economics and has a pretty good handle on the material. James is internally deciding on whether he should put additonal efforts toward study for his Economic final. James is using what type of analysis?
b. Marginal Analysis
c. Returns analysis

2) Happy is continuing weighing the costs and benefits of studying for his MBA finals. As Happy analyzes how much studying he should do to be successful in preparing for the test using the marginal principle philosphy, how should Happy make his decision?
a. Study until his marginal benefits equal marginal costs
b. Study up until the point where marginal benefits are great than marginal costs
c. Study up until the point where marginal benefits are less than marginal costs
d. Quit studying he has no chance to improve his situation
e. None of the above

3) Brenda can only solely concentrate on her studies for 2 hours, after that she starts partially studying while watching TV. Unfortunately Brenda is not a good mulit-tasker and doesn't retain any of the information while she watches TV. In this case Brenda:
a. Study marginal benefits equal marginal costs at 2 hours
b. Would be better off from a marginal value stand point stop studying after 2 hours
c. Should continue to study while watching TV because she is able to have some marginal benefit from looking at the information
d. Both A and B
e. Both A and C

4) The maximum net benefit is achieved when which of the following are true:
a. The slope of the marginal value line equals the slope of the marginal cost
b. The slope of the marginal net benefit equals the slope of the total costs
c. The slope of the marginal cost equals the slope of the marginal benefit
d. The slope of the marginal value is zero
e. The marginal value is at the maximum total benefit point

True/False Questions

1) (True/False) Given a set a data for consumer's marginal utility of consumption, marginal value can be measured. Answer: True

2) (True/False) Marginal value will be the same for each individuals' comsumption of the product. Answer: False

3) (True/False) Depending on the product, gathering data for consumer's marginal utility of consumption, can be difficult and complex to quantify and measure. Answer: True

4) (True/False) Personal preferences do not guide an individuals' marginal value for consumption of a product. Answer: False

5) (True/False) Measuring marginal value is an important tool for managers in business to utilize to price a product, forecast demand, and make product manufacturing decisions. Answer: True

6) (True/False) As a student, you may weigh the marginal value as a trade-off of how much time to spend on completing and reviewing assignments in direct relation to how much it will affect your grade on the assignment and in the course. Answer: True

References:

1. Managerial economics and Business Strategy, Michaeal R. Baye, Fourth Edition, Chapter 1
2. Primer on Economic Analysis, Frank Rotering, 2005, http://members.shaw.ca/needsandlimits/Primer.html