Marginal thinking is best demonstrated by which decision rule?

• A. Choose an action if the marginal benefit exceeds the marginal cost for the next unit of activity.
• B. Choose an action that maximizes total revenue, even if marginal cost exceeds marginal benefit.
• C. Choose an action if total benefits exceed total costs, regardless of changes at the margin.
• D. Choose an action if average benefit exceeds average cost.

Answer: (A)

Verified step by step guidance

1. Understand the concept of marginal thinking: it involves comparing the additional (marginal) benefit of an action to the additional (marginal) cost of that action.
2. Identify the decision rule that focuses on the next unit of activity, which means evaluating whether the benefit gained from one more unit is greater than the cost incurred from that unit.
3. Recognize that the correct decision rule is to choose an action if the marginal benefit (MB) exceeds the marginal cost (MC) for the next unit, because this ensures that each incremental step adds net value.
4. Contrast this with other options: maximizing total revenue without considering marginal cost can lead to losses; comparing total benefits to total costs ignores the incremental changes; and using average benefits and costs does not capture the decision-making at the margin.
5. Conclude that marginal thinking is best demonstrated by the rule: choose an action if \(\text{MB} > \text{MC}\) for the next unit of activity.