Engineering Economic Analysis

The Decision-Making Process 13

· One might wish to invest in the stock market, but the total cost of the investment is

not fixed, and neither are the benefits.

·An automobile battery is needed. Batteries are available at different prices, and

although each will provide the energy to start the vehicle, the useful lives of the

variousproductsare different. '

What should be the criterion in this category? Obviously, to be as economically efficient as

possible, we must maximize the difference between the return from the investment (benefits)

and the cost of the investment. Since the difference between the benefits and the costs is

simply profit, a businessperson would define this criterion as maximizing profit.

For the three categories, the proper economic criteria are:

Category

Fixed input

Fixed output

Neither input nor

output fixed

Economic Criterion

Maximize the benefits or other outputs.

Minimize the costs or other inputs.

Maximize (benefits or other outputs minus costs

or other inp:uts)or, stated another way, maximize

profit.

6. Constructing the Model
   At some point in the decision-making process, the various elements must be brought
   together. Theobjective, relevant data, feasible alternatives,andselection criterionmust
   be merged. For example, if one were considering borrowing money to pay for an auto-
   mobile, there is a mathematical relationship between the following variables for the loan:
   amount, interest rate, duration, and monthly payment.
   Constructing the interrelationships between the decision-making elements is frequently
   called model building or constructing the model. To an engineer, modeling may be a scaled
   physical representationof the real thing or system or amathematical equation,or set of
   equations, describing the desired interrelationships. In a laboratory there may be a physical
   model, but in economic decision making, the model is usually mathematical.
   In modeling, it is helpful to represent only that part of the real system that is important
   to the problem at hand. Thus, the mathematical model of the student capacity of a classroom
   might be,

lw

Capacity= k

where 1 =length of classroom, in meters

w=widthof classroom,in meters

k=classroom arrangement factor

The equation for student capacity of a classroom is a very simple model; yet it may be

adequate for the problem being solved.

7. Predicting the Outcomes for Each Alternative
   A model and the data are used to predict the outcomes for each feasible alternative. As
   was suggested earlier, each alternative might produce a variety of outcomes. Selecting a
   motorcycle, rather than a bicycle, for example, may make the fuel supplier happy, the

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