In marginal analysis, what is typically the first step a decision-maker should take when evaluating whether to undertake an additional (marginal) action?

• A. Choose the alternative with the highest total benefit without considering additional costs.
• B. Define the decision alternative and identify the relevant marginal benefit and marginal cost of one additional unit.
• C. Compute average benefit and average cost over all units produced and compare them.
• D. Ignore sunk costs and choose the option with the lowest total cost, regardless of marginal effects.

Answer: (B)

Verified step by step guidance

1. Understand that marginal analysis involves comparing the additional benefits and additional costs of one more unit of an action or decision.
2. The first step is to clearly define the decision alternative you are evaluating, which means specifying the exact additional action or unit under consideration.
3. Identify the relevant marginal benefit, which is the extra benefit gained from undertaking one more unit of the action.
4. Identify the relevant marginal cost, which is the extra cost incurred from undertaking that additional unit.
5. Once you have these marginal values, you can compare the marginal benefit and marginal cost to decide whether the additional action should be taken.