Exam 1: Economic Methods and Optimization: Doing the Best You Can

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Marginal analysis is a cost-benefit analysis that compares the consequences of doing one step more of something. Hence, it is a cost-benefit calculation that studies the difference between a feasible alternative and the next feasible alternative. To arrive at the optimum choice of apartment using marginal analysis, it is essential to calculate the marginal commuting cost and the marginal rent cost for movement between each set of alternatives. This is shown in the table below.
The marginal total cost of moving from Apartment 1 to Apartment 2 is -$75. This implies that the individual gains $75 if he moves from Apartment 1 to Apartment 2. This move is beneficial. The second movement-from Apartment 2 to Apartment 3-has a marginal total cost of -$15. This implies that the individual gains $15 if he moves from Apartment 2 to Apartment 3. This move is beneficial too. The third move-from Apartment 3 to Apartment 4-has a marginal total cost of $5. This implies that the individual loses $5 if he moves from Apartment 3 to Apartment 4. This move is not beneficial. From this analysis, it is clear that moving toward Apartment 3 is beneficial, whereas moving away from Apartment 3 is not. This implies Apartment 3 is the optimum choice for the individual. The principle used to arrive at the optimum choice is referred to as the Principle of Optimization at the Margin. It states that an optimal alternative has the property that moving to it makes the decision maker better off and moving away from it makes the decision maker worse off.