Lecture 2-The Economic Way of Thinking

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1 Aug 2010
School
Department
Course
Professor
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
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Lease Payment: $12,000 per month Ù $400 per day
Dinner: 150 meals
Lunch: 8 meals
Additional (Marginal) Revenue
8 meals at $20 = $160
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