CSm Landsburg 5 A3

[RiSK kid]

True or False:

According to Landsburg, the equimarginal principle states that all possible activities should be pursued up to the point at which marginal cost equals marginal benefit.

Definition in CSM: equimarginal principle - principle that an activity should be pursued up to the point where MC equals MB.

Answer to the question:
False: An activity has to be worth pursuing in the first place. p125.


Does this make any sense or am I missing something

[Gandalf]

Haven't seen Landsburg.

The answer seems to be saying that: "Suppose you were considering an activity that would have a fixed start up cost of 1 million. Suppose, if start up costs were 0, you would pursue that activity until 1000 units were produced (by the equimarginal principle), for total gain on those 1000 units of 100,000.

Should you spend the 1 million and then produce up to 1000? No, you should not produce any.

[retaker]

Definition:
Any activity that is worth pursing at all should be pursued until MC = MR.

[RiSK kid]

Thanks,

That's what i thought I was missing.
I guess the SOA really does ask specific questions that relate to only the Landsburg text.

Oh well, I guess I will have to see if my strategy of not reading the texts will work. (I'm just doing practice problems since I have already learned economics in university)

[Gandalf]

That's what i thought I was missing.
I guess the SOA really does ask specific questions that relate to only the Landsburg text.
This is not an example of a text-specific question. I haven't read Landsburg, and came up with a counter-example. No text would conclude that the activity in the counter-example should be pursued until 1000 units were produced. (Unless your argument is that the equimarginal principle states that the activity should be pursued until that point, and that it is other principles that say you not pursue it at all.)

It's text-specific to the extent that some texts might not even define "equimarginal".

Did the SOA ask this question?

[RiSK kid]

yup I think it was a (99 soa exam question)

But don't quote me on that