Marginal analysis: Marginal analysis is an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity. Companies use marginal analysis as a decision-making tool to help them maximize their potential profits. Marginal refers to the focus on the cost or benefit of the next unit or individual, for example, the cost to produce one more widget or the profit earned by adding one more worker. (1) Assume that the demand and supply functions for handguns are given by the following equations:

quantity demanded = 50 – P

quantity supplied = 4P

where P means price. Suppose the government is interested in raising the incomes of handgun makers and thinks it can do this by setting a legal minimum for the price of guns at 12.

Compare the quantity of handguns bought and sold, as well as the total expenditure by households on handguns, before and after the government policy.