Class Notes (903,542)
CA (538,021)
UTSG (45,699)
ECO (1,630)
ECO101H1 (575)
Jack Carr (83)
Lecture 2

Lecture 2-The Economic Way of Thinking

3 Pages
104 Views

Department
Economics
Course Code
ECO101H1
Professor
Jack Carr

This preview shows page 1. Sign up to view the full 3 pages of the document.
The Economic Way of Thinking
Rational Decision Making
Undertake activity if marginal (additional) benefit exceeds marginal
(additional) cost.
Insights:
1. Include all opportunity costs
2. Ignore sunk costs
Examples
A. Restaurant: Should It Stay Open for Lunch?
Lease Payment: $12,000 per month Ù $400 per day
Dinner: 150 meals
Lunch: 25 meals
Additional (Marginal) Revenue
25 meals at $20 = $500
Additional (Marginal) Costs
Chef: 3 hours at $30 = $90
Waiters (2): 6 hours at $10 = $60
Food: 25 meals at $5 = $125
____
$275
Conclusion: 1) $500-$275= $225 Æ profitable to stay open
2) Fixed (sunk) cost of lease is not relevant
/HW¶VWDNHDORRNDWWKHVDPHH[DPSOHDJDLQ
Lease Payment: $12,000 per month Ù $400 per day
Dinner: 150 meals
Lunch: 8 meals
Additional (Marginal) Revenue
8 meals at $20 = $160
www.notesolution.com

Loved by over 2.2 million students

Over 90% improved by at least one letter grade.

Leah — University of Toronto

OneClass has been such a huge help in my studies at UofT especially since I am a transfer student. OneClass is the study buddy I never had before and definitely gives me the extra push to get from a B to an A!

Leah — University of Toronto
Saarim — University of Michigan

Balancing social life With academics can be difficult, that is why I'm so glad that OneClass is out there where I can find the top notes for all of my classes. Now I can be the all-star student I want to be.

Saarim — University of Michigan
Jenna — University of Wisconsin

As a college student living on a college budget, I love how easy it is to earn gift cards just by submitting my notes.

Jenna — University of Wisconsin
Anne — University of California

OneClass has allowed me to catch up with my most difficult course! #lifesaver

Anne — University of California
Description
The Economic Way of Thinking Rational Decision Making Undertake activity if marginal (additional) benefit exceeds marginal (additional) cost. Insights: 1. Include all opportunity costs 2. Ignore sunk costs Examples A. Restaurant: Should It Stay Open for Lunch? Lease Payment: $12,000 per month Ù $400 per day Dinner: 150 meals Lunch: 25 meals Additional (Marginal) Revenue 25 meals at $20 = $500 Additional (Marginal) Costs Chef: 3 hours at $30 = $90 Waiters (2): 6 hours at $10 = $60 Food: 25 meals at $5 = $125 ____ $275 Conclusion: 1) $500-$275= $225 Æ profitable to stay open 2) Fixed (sunk) cost of lease is not relevant /HW¶VWDNHDORRNDWWKHVDPHH[DPSOHDJDLQ Lease Payment: $12,000 per month Ù $400 per day Dinner: 150 meals Lunch: 8 meals Additional (Marginal) Revenue 8 meals at $20 = $160 www.notesolution.com Additional (Marginal) Costs Chef: 3 hours at $30 = $90 Waiters (2): 6 hours at $10 = $60 Food: 8 meals at $5 = $40 ____ $190 Conclusion: 1) $160-$190= $-30 Æ not profitable to stay open 2) Fixed (sunk) cost of lease is not relevant B. Should Jack and Jill Attend Sports Event? 1. Marginal benefit of attending sports event: $100 (both Jack and Jill) 2. Ticket Price: $50 1) Jack buys one week in advance 2) Jill plans to buy on day of event 3. Subway breaks down on day of event, and Jack and Jill both face unexpected cost: $75 for taxis. 4. Should Jack attend event? Should Jill attend event? Answer: Jack should attend: MB = 100 MC = 75 MB >MC [Ticket price is a sunk cost] Jill should not attend: MB = 100 MC = 75 + 50 = 125 MB < MC C. Example (Rational Decision Making) 1. You buy $30 concert ticket, but lose ticket on way to concert. Should you buy a next ticket (if you have the funds)? 2. Marginal cost = $30 www.notesolution.com Marginal benefit > $30 (or you would not have bought original ticket) Marginal benefit > Marginal cost Æ Buy (new) ticket Incentive Alters marginal benefit or marginal cost of an action (and can thus affect whether an action is taken) Incentives: Unintended Consequences of Public Policy 1. To protect tenants, province introduces rent controls, to prevent higher rents. Response: entrepreneurs choose to build fewer apartments, thus increasing the shortage of rental accommodation in the long run 2. To protect workers, province requires firms to make large severance payments if plant is shut down. Response: firms can choose where to locate plants, and fewer plants may be opened (thus reducing job opportunities) 3. Province requires use of seatbelts, to reduce injuries Response: 1. before OHJLVODWLRQGULYHUVFKRRVHGHJUHHRI³FDUH´E\ZHLJKLQJmarginal benefits and marginal cost Marginal benefit (reduced accidents, injuries) Marginal cost (drive slower, pay more attention) 2. With legislation, maUJLQDOEHQHILWRI³FDUH´GHFOLQHVOHVVOLNHO\WRbe injured, if accident) 'ULYHFKRRVHWRH[HUFLVHOHVV³FDUH´ Evidence (after mandatory seatbelt legislation) Number of serious injuries falls Number of accidents rises www.notesolution.comThe Economic Way of Thinking Rational Decision Making Undertake activity if marginal (additional) benefit exceeds marginal (additional) cost. Insights: 1. Include all opportunity costs 2. Ignore sunk costs Examples A. Restaurant: Should It Stay Open for Lunch? Lease Payment: $12,000 per month $400 per day Dinner: 150 meals Lunch: 25 meals Additional (Marginal) Revenue 25 meals at $20 = $500 Additional (Marginal) Costs Chef: 3 hours at $30 = $90
More Less
Unlock Document


Only page 1 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit