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CA Foundation · Business Economics · Nature and Scope of Business Economics

A firm's manager says, 'Rather than judging a decision by total cost and total revenue, I look only at how much the decision changes costs and revenues.' Which economic principle is the manager applying?

The manager is applying the incremental principle. This principle judges a decision by the change it brings about in total revenue and total cost, rather than by their overall levels. A decision is accepted if incremental revenue exceeds incremental cost.

  1. AOpportunity cost principle
  2. BIncremental principleCorrect
  3. CEqui-marginal principle
  4. DTime perspective principle

Explanation

The incremental principle evaluates a decision by the change in total revenue and total cost that it causes. A decision is worthwhile if the increase in revenue exceeds the increase in cost. The opportunity cost principle instead concerns the value of the next best alternative forgone.

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