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Trading benefits against costs 45
Value of benefits
100
50
0 40000
Efficient frontier
30000 20000 10000 0
Annual cost ($)
Figure 3.6 – A plot of benefits against costs for the seven offices
A
E
aggregate value of benefits has been plotted against the annual cost for
each of the offices. Note that the cost scale has been ‘turned round’, so
that the lower (and therefore more preferable) costs are to the right. This
is to make this graph comparable with ones we will meet later in the
book. Clearly, the higher an office appears on the benefits scale and the
further to the right on the cost scale, the more attractive it will be. If we
compare Addison Square (A) with Elton Street (E) it can be seen that,
while both have similar costs, Addison Square has higher benefits. It
would not therefore be worth considering Elton Street, and this office
is said to be dominated by Addison Square. Similarly Gorton Square
(G) not only has lower costs but also higher benefits compared with
Bilton Village (B), Denver Street (D) and Filton Village (F). Therefore,
B, D, and F are also dominated offices. Thus the only locations which
are worth considering are Addison Square (A), Gorton Square (G) and
Carlisle Walk (C). These non-dominated offices are said to lie on the
efficient frontier.
The choice between the three offices on the efficient frontier will
depend on the relative weight the owner attaches to costs and benefits.
If he is much more concerned about benefits, then Addison Square will
be his choice. Alternatively, if he is more concerned to keep his costs
low, then he should choose Carlisle Walk. Gorton Square would be an
intermediate choice. It costs $5300 more per year than Carlisle Walk, but
offers slightly higher benefits.
This information may be sufficient for the owner to make a choice.
At the very least, it should illuminate his understanding of the decision
problem. He may be surprised that Bilton Village has fared so
F
D
B
G
C