Refer to the figure below. 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 marginal cost equals marginal benefit, which in this case is $100 = $150. This implies that the cost of writing the contract outweighs the benefit, so the optimal choice is to decrease the contract length, or not write the contract at all. Therefore, the best choice is C, to decrease the contract length. Choices A, B, and D would all lead to contracts that have a higher cost than benefit.

Refer to the Figure Below