Question

Willa and Westley are siblings who built a hair salon business from the ground up. They are now contemplating opening an additional salon location. The estimate to open an additional salon would mean adding $1 million in expenses with their profit increasing by $400,000 each year for the next 5 years (all other things equal). Willa and Westley decide:_____________

a. to take on the new salon because the expected marginal benefit ($2 million over 5 years) is greater than the estimated marginal cost ($1 million).
b. to not open a new salon because the marginal costs prove to be too high.
c. to open a second salon because the marginal cost of the new salon is low compared to other similar projects.

Answer 1

A

Step-by-step explanation:

The marginal benefit of a production activity is the change in total benefit as a result of increasing quantity produced by one unit

Marginal cost is the change in total cost as a result of increasing the quantity produced by one unit.

An activity should be undertaken if the marginal cost is less than the marginal benefit. It means that the activity is profitable.

Here the marginal benefit = 400,000 x 4 = 2,000,000

the marginal benefit is greater than the marginal cost. Thus, the new salon can be established