For example, suppose you are considering calling a friend on your cell phone. You decide that talking with her for 10 minutes would give you a benefit that you value at about $7. Your cell phone service costs you $40 per month plus $0.50 per minute for whatever calls you make. You usually talk for 100 minutes a month, so your total monthly bill is $90 ($0.50 per minute times 100 minutes, plus the $40 fixed fee). Under these circumstances, should you make the call? You might be tempted to reason as follows: “Because I pay $90 for 100 minutes of calling each month, the average minute on the phone costs me $0.90. So a 10- minute call costs $9. Because that $9 cost is greater than the $7 benefit, I am going to skip the call.” That conclusion is wrong, however. Although the average cost of a 10- minute call is $9, the marginal cost—the amount your bill increases if you make the extra call—is only $5. You will make the right decision only by compar- ing the marginal benefit and the marginal cost. Because the marginal benefit of $7 is greater than the marginal cost of $5, you should make the call. This is a prin- ciple that people innately understand: Cell phone users with unlimited minutes (that is, minutes that are free at the margin) are often prone to make long and frivolous calls.
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- (no access) - Principles of Economics, 7th Edition by N. Gregory Mankiw[Dr.Soc].pdf, p42
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