How would useing a cost benefit analysis model can help with rational decision- making in production...?

Question

And how does the idea of marginalism affect this type of analysis.

Answer 1

A cost benifit analysis is used by companies before they invest captial and time into a new project. It looks at income projections as well as expenses. They look at how many years it will take to pay off loans for captial and at what year they will start to make a profit and how many years can the operation can run for.

A good example is a mining coportation. They look at how much of a resource there is, say coal and they project years into the CBA. Lets say they expect that a new mine can dig up coal for 20 years because of the amount in a certian area. They look at how long it will take to pay off debt and at what year they will start making profit. From this information, they can see if its financially sound to build a new mine.

Marginalism in the form of current and projected output is also used in the CBA. The orginal CBA is only a guide for a snap shot of the future. Production levels will obviously change over time due to demand and supply levels.