ECO100Y1 Lecture Notes - Lecture 1: Sunk Costs, Marginal Utility, Fixed Cost

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Undertake activity if marginal(additional) benefit exceeds marginal costs. Costs which are incurred whether or not action is taken. Only relevant costs are those which can be avoided if action is not taken. Example 1: marginal benefit of attending sports event: Mb = 100 mc = 75 mb > mc *ticket price is a sunk cost* Mb = 100 mc = 75 + 50 = 125 mb < mc. You buy an old truck for ,000, plan to spend ,000 to get it running, and sell it for ,000. You discover that it will require ,000 to repair the truck. [insight: the purchase price is a fixed cost and should not enter your decision] Answer: mb: , 000 mc: mb > mc. If you repair the truck, you lose ,000, if you do not repair the truck, you lose even more, ,000. Lease payment: ,000 per month - per day.

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