Practice question · Sort into groups
Sort each managerial rule by whether it is marginal reasoning done right, or a totals fallacy.
Groups: Correct marginal reasoning · Totals fallacy
- This product line made money last year, so double it
- We are profitable overall, so expand output
- Stop discounting when the marginal sale loses money
- Advertise until the marginal euro returns exactly one euro
- Hire while the next worker adds more value than her wage
Hints
- Decisions are made at the margin, not from totals.
- Averages describe the past; only the next unit guides the next step.
Show the answer
Correct marginal reasoning: Hire while the next worker adds more value than her wage, Advertise until the marginal euro returns exactly one euro, Stop discounting when the marginal sale loses money
Totals fallacy: We are profitable overall, so expand output, This product line made money last year, so double it
Why
Decisions live at the margin. Totals report the past; only the next unit’s revenue and cost say whether to take one more step.
Practise Optimization in Economics
The app has 8 more questions on this lesson, and keeps your place in the course. Business I is free to start.
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