Final answer:
In a cost-benefit approach, managers should allocate resources when the expected benefits to the company exceed the expected costs. This decision is supported by marginal analysis, which compares marginal costs with marginal benefits to ensure resources are used where they offer the greatest benefit.
Step-by-step explanation:
In a cost-benefit approach, managers should spend resources if the expected benefits to the company exceed the expected costs. This is in line with the principles of marginal analysis which suggests that when making decisions, it is beneficial to weigh the marginal costs—the extra cost of adding an additional unit—against the marginal benefits—the extra benefit of adding the same unit. If the marginal costs are higher than the marginal benefits, then these resources could potentially be allocated more efficiently elsewhere in the economy, implying that more value could be created by using them for different purposes.
For instance, think of the market price as representing the gain to society from a purchase, because it represents what someone is willing to pay. When the price (P) is greater than marginal cost (MC), the benefits from producing more of a good exceed the costs, and thus society benefits from more production of that good. Conversely, if P < MC, it denotes a situation where the social costs of producing an additional unit exceed the social benefits, suggesting that less of the good should be produced. The ideal balance for society's costs and benefits occurs when P = MC, which is what profit-maximizing perfectly competitive firms strive to achieve.