In economics, what does it mean when we say that optimal decisions are made at the margin?

• A. Decisions are made by maximizing total output regardless of costs.
• B. Decisions are made by minimizing average costs.
• C. Decisions are made by comparing the additional benefits and additional costs of a choice.
• D. Decisions are made by considering only the total costs and total benefits.

Answer: (C)

Verified step by step guidance

1. Understand the concept of 'margin' in economics: it refers to the additional or incremental changes resulting from a decision, such as the additional cost or additional benefit of producing or consuming one more unit.
2. Recognize that making decisions 'at the margin' means comparing the extra (marginal) benefits and extra (marginal) costs associated with a small change in the level of an activity.
3. Formulate the decision rule: an optimal decision occurs when the marginal benefit (MB) equals the marginal cost (MC), i.e., \(\text{MB} = \text{MC}\).
4. Interpret this rule as choosing an action if the marginal benefit exceeds the marginal cost, and rejecting it if the marginal cost exceeds the marginal benefit, thereby maximizing net benefit.
5. Contrast this with other approaches like maximizing total output regardless of costs or minimizing average costs, which do not focus on the incremental trade-offs that guide optimal decision-making at the margin.