1. Marginal Analysis One of economist’s favorite “tricks!”
Take no action unless the expected gain exceeds the expected cost!
As long as the extra revenue exceeds the extra cost, do it again!

2. Suppose the folks listed in the following table are willing to pay the prices shown for a custom yacht.
Bill Gates
J.C. Penney
J. D. Rockefeller
J. P. Morgan
Paul Allen
Create your own table with these prices and the quantity demanded at each price.
$13 million
$11 million
$9 million
$7 million
$5 million
Then make a new column for the total revenue you would get for each pair of price and quantity.
Problem modeled after Paul Heyne, The Economic Way of Thinking. Page 213.

3. Now let’s find marginal revenue.
Quantity Demanded
1 (Bill only!)
2 (Bill + JCP?)
3 (now who?) 4 5
Price
$13 million
$11 million
$9 million
$7 million
$5 million

4. Change in Total Revenue/Change in Quantity =
Marginal Revenue
Sell 1, $13 million
Second sale adds $9 million (Figure out why?)
Third unit adds $5 million
And the fourth, $1 million
But the fifth, $3 million
(red indicates negative)
Note that in competitive market each yacht sells for the same price.

5. Now think about how many you choose to sell
Now think about how many you choose to sell. Each yacht costs $6 million.
Marginal Revenue
$13 million
$9 million
$5 million
$1 million
$3 million (red indicates negative)
Marginal Cost
$6 million

6. Profit? Go back and look at Marginal Revenue compared to Marginal Cost
How many yachts would you choose to sell, assuming you charge each person the same price.
Two is the correct answer, and price would be $11 million each!

7. Price Discrimination?
Suppose you could charge each buyer the full price they are willing to pay!
Cool!
Go back to your table and add a column for the marginal revenue under this new condition.

8. Marginal Revenue (with P.D.)
Yacht 1 Adds $13 million
Yacht 2 Adds $11 million
Yacht 3 Adds $9 million
Yacht 4 Adds $7 million
Yacht 5 Adds $5 million
How many would you choose to sell now?

9. FOUR?

10. And your profit would be ….
$16 million!
Let’s see now, $16 million profit versus $9 million.
Hmmmmmmmmmmm!
That’s all folks!