Economics Question: Finding Marginal Costs and Benefits

Question

You are selling your 1996 Mustang. You have already spent $1000 on repairs. At the last minute, the transmission dies. You can pay $600 to have it repaired, or sell the car “as is.”

A.) What is the marginal cost of fixing the transmission?

B.) What is the marginal benefit of fixing the transmission if the Blue book value for the car is $6000 if the transmission works, $5500 if it doesn’t?

C.) Is it worth fixing the transmission? Why

Answer 1

The marginal cost is $600. The xar will increase in value by 500 if you fix the transmission. Hence, the marginal benefit is 500. MC>MB sell it as is.

Answer 2

OK first things first...whatever you've already spent (and can't get back) doesn't matter. It's a sunk cost, and as the saying goes sunk costs are sunk. Economic rationality -- which isn't always emotionally satisfying -- means basing decisions on future costs and benefits. Don't throw good money after bad.

Marginal costs mean the change in total costs resulting from producing the last unit (or, if specified, the last X number of units or the last Y quantity). Same goes for benefits.

Now with a binary decision like this -- you either get the transmission fixed or you don't -- the term "marginal" is redundant. The specific cost of having it fixed is $600. The specific benefit, assuming that the Blue Book value is in fact what the customer will pay, is $6000 - $5500 = $500.

$600 > $500 means specific/marginal costs exceed specific/marginal benefits. And that in turn means don't bother.