Suppose that the marginal benefit of writing a contract is $100 and the marginal cost of that contract is $150.Based on this information, the optimal contract length should be

Question

Quizplus · Accepted Answer

The optimal contract length occurs where the marginal benefit (MB) equals the marginal cost (MC). In this case, since MB is lower than MC, it means that the marginal cost of writing a contract exceeds its marginal benefit. Therefore, it would not make sense to continue writing longer contracts. Instead, the optimal choice would be to decrease the contract length, such that the marginal benefit and marginal cost are equalized.

Suppose That the Marginal Benefit of Writing a Contract Is