CHAPTER THREE –OPTIMIZATION, DOING THE BEST YOU CAN

Question 1

Name the two kinds of optimization and explain them

Answer 1

1. Optimization in levels calculates the total net benefit of different alternatives, and then chooses the
   best alternative.
2. Optimization in differences calculates the change in net benefits when a person switches from one
   alternative to another and then uses these marginal comparisons to choose the best alternative.
   For example, choosing between two goodies bag where only one candy changes; you’ll choose
   your favorite candy.

Question 2

Name the three steps of optimization in levels

Answer 2

1. Translate all costs and benefits into common units, like dollars per month.
2. Calculate the total net benefit of each alternative.
3. Pick the alternative with the highest net benefit - the optimum is the best feasible choice, the
   optimal choice.

Question 3

Name the three steps of optimization in differences

Answer 3

1. Translate all costs and benefits into common units, like dollars per month.
2. Calculate the marginal consequences of moving between alternatives.
3. Apply the Principle of Optimization at the Margin by choosing the best alternative with the property
   that moving to it makes you better off and moving away from it makes you worse off.

Question 4

What is marginal cost?

Answer 4

Marginal cost is the extra cost generated by moving from one feasible alternative to the next feasible
alternative.