This or That: marginal cost benefit analysis

By Alison Roth (section 02, Spring 2011)

While digging through my wallet to find spare change for the Laundromat, I realized how a college student views spending money now-a-days. In marketing class the other day, my professor states ‘college students spend future money.’ College students dream that after graduation one would excel to a high paying career, thus we spend more money we don’t have, thinking our future job income will save us.

I have to make decisions on certain purchases every day such as do I eat lunch at home where I have food, but have to wait after long classes or buy lunch while on campus and spend money I could spend on something else. I don’t just fight over where to eat lunch, but whether or not to spend money on new clothes that isn’t a need but a want. The economic way of thinking would call me a rational self-interested person. I act on certain decisions that will benefit not only me, but things I’m interested in too. Whenever I go to make a decision on a purchase, whether good decision or not, I rationally have to think out my options and then act on them. A way to help make decision making easier is due to the help of a Marginal Cost Benefit Analysis, where you break decisions into the smallest possible changes from the current state. If I were to make the decision to order a new outfit online, I would have to weigh the costs and benefits of such a decision before I acted, ex ante. Cost of buying a new outfit: less money for groceries during the week, less money for bills, and make mom mad for spending money. Benefits for buying a new outfit: have the latest trend, feel confident in a new outfit, and less likely to buy more since my shopping impulse be satisfied. Now I have to decide if the costs outweigh the benefits and vice versa. I have limited resources of money every week with a small paycheck from work study and I would have to give something up in order to buy a new outfit, but I have unlimited wants for new outfits. In order to help find a way to solve problems, algorithm, I must find the Maximum Net Benefit. The more I spend on unneeded clothing the cost goes up and benefits go down resulting in Marginal Cost (MC) being greater than Marginal Benefit (MB) (MC>MB). The Maximum Net Benefit, in this case, MC and MB are equal. MB is telling me to spend money on a new outfit where MC is telling me to spend it on bills and groceries. To satisfy the equation and solve the decision crisis, I must not spend my money on a new outfit, as a rational decision maker. For Maximum Net Benefit, MC = MB: Not to spend on an outfit. Until I make a bigger paycheck I will then be able to focus on bills, groceries, and my wants such as clothing. Economists will be looking at my decision and wonder what I didn’t chose. Why didn’t I buy that new outfit? If I was to have bought and wore the new outfit, that is a sunk cost, I wouldn’t be able to get that money back if I had made a wrong decision and needed it for bills. Ex post of my decision, economists will record what happened and the value of what I gave up. However, college students have expectations for future incomes and will, for now, have to spend wisely on small budgets. As a college student on a small budget, I will put that want for an outfit on hold for now.