Hello All,
I have a basic question. Let’s say that I spend time studying CFA instead of watching movies. Does this mean that for me, the marginal cost of not watching the movie < the marginal benefit of studying for the CFA? My goal is to catch the intuition behind the word “marginal.”
Do you think I should be using the marginal functions, or the regular cost / benefit functions? I am curious. Can someone please confirm?
Regards,
Allalongthewatchtower
Not necessarily. Firstly, you need to determine whether you are getting any benefit at all from the said activity. (studying for CFA in this case). It could be that there are significant benefits of watching the movie but none or diminishing returns from cfa studying. It’s highly subjective in this case since we cannot quantify the marginal cost (MC) of watching movies or marginal benefits (MB) of studying for CFA. We could bring the concept of “utility” here, to quantify the MC of watching movie and MB of studying for CFA for you, but that would just complicate things further.
The word “marginal” is used to see the effects of “additional inputs” on “additional outputs”.
Marginal=additional=incremental
Depends on the problem but marginal functions will be used 95% of the time, especially in CFA curriculum.
In this case, assuming we measure inputs/outputs in units of one movie, then the marginal cost would be the (net) opportunity cost of watching one movie (i.e., the enjoyment you’d get from the move less the value of your time spent watching it) plus the agony of spending that time studying the CFA curriculum; the marginal benefit would be the increase in value from (presumably) increasing the probability that you will pass the CFA exam You should study only when the marginal benefit exceeds the marginal cost.
Hello S2000magician,
Thank you so much for your response. I am not sure why Marginal cost of watching a movie = opportunity cost of watching a movie + the agony of studying the CFA.
As per the definition of Opportunity cost = the payoff forgone in pursuing the best of the alternatives. More formally, the opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. (Source : Wiki)
Given this definition above, I believe that the opportunity cost of watching a movie is the benefit foregone by studying for the CFA. Hence, I am good with the first part in your equation: the opportunity cost of watching a movie should be the benefit of studying for the CFA. However, I am not sure why you have added “the agony of studying the CFA.” (the second part in your equation.) The agony is not a benefit. I am not how this agony thing fits the definition of opportunity cost. Can you please explain this?
I would really appreciate your response.
Best regards
I, too, am not sure why the marginal cost of watching a movie would be the sum of those two.
Fortunately, that’s not what I wrote.
If you read what you asked originally, you’ll see that you asked about the marginal cost and marginal benefit of studying the CFA curriculum. That’s what I was explaining: _the marginal cost of studying the CFA curriculum _ is the sum of those two.
Thank you so much for the clarification, S2000magician. My sincere apologies for creating the confusion. Your explanation is perfectly clear now.
Best regards
Whew!
Glad the confusion’s cleared up.
Enjoy your Summer.