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8 Feb 2011
School
Department
Course
Professor
15th September 2010
Economics 100
The economic way of thinking
Q1. You decide to attend a concert. It costs 200$. You value the concert at 400$. Your next
best alternative is to go to a restaurant, which you value at 150$ and which costs 100$.
What is the opportunity cost?
Answer: 200 + (150 100) = 250
How does the opportunity cost change if the satisfaction you get from going to the concert
increases from 400 to 500?
Answer: not at all since the opportunity cost does not depend on the value to you of the
action taken.
Rational decision making
Undertake activity if the marginal (additional) benefit exceeds marginal (additional) cost.
Insights:
1. Includes all opportunity costs.
2. Ignore sunk costs.
Sunk costs fixed costs costs which are incurred whether or not the action is taken
Insight only relevant costs are those which can be avoided if action is not taken.
Restaurant : should it stay open?
Lease payment: $12000 per month - $400 per day
Dinner: 150 meals
Lunch: 25 meals
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Additional Marginal revenue:
25 meals at 20$ = 5000$
Additional Marginal costs
Chef: hours at 30$ - 90$
Waiters (2): 6 hours at 10$ = 90$
Food: 25 meals at 5$ = 125$
Total: 275$
Conclusion:
1.$500 - $275 = $225 profitable to stay open
2.Fixed (sunk) cost is not relevant.
Marginal benefit of attending sports event:
100$ (both Jack and Jill)
Ticket Price: 50$
1.Jack buys one week in advance
2.Jill plans to buy on the day of the event
Subway breaks down on the day of the event, jack and jill both face unexpected cost: 75$ for
taxis
Should jack attend the event?
Should Jill attend the event?
Answer: Jack should attend
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MB = 100 MC = 75
MB > MC (ticket price is sunk cost)
Jill should not attend the event:
MB = 100 MC = 50+75 = 125$
MC > MB
You buy a ticket to a convert at a discount price of 50$. You plan to take public
transportation which costs 2$. On the day of the concert, there is a power failure, and the
only way you can attend the concert is by taking a taxi, which costs 30$. It is too late to try
and sell your ticket.
a)Should you pay for the taxi and go to the concert?
Answer: yes
Marginal benefit = atleast > 52
Marginal cost = 30$
Suppose you decide to go to the concert and pay the 30$ costs of the taxi but upon arriving
you discover you have left your ticket at home. You can buy a new ticket at the full price of
60$. Should you buy the ticket?
Marginal benefit: (At least) < 52
Marginal cost: 60#
If marginal benefit is greater than 60$, you should buy a ticket.
Incentive:
Alters marginal benefit or marginal cost of an action and can thus affect whether an action
is taken or not.
Incentives: unintended consequences of public policy
1.To help low paid workers province raises the minimum wage rate to $ 10.00 per hour.
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Document Summary

Your next best alternative is to go to a restaurant, which you value at 150$ and which costs 100$. Answer: 200 + (150 100) = 250. Answer: not at all since the opportunity cost does not depend on the value to you of the action taken. Undertake activity if the marginal (additional) benefit exceeds marginal (additional) cost. Sunk costs fixed costs costs which are incurred whether or not the action is taken. Insight only relevant costs are those which can be avoided if action is not taken. Lease payment: per month - per day. Waiters (2): 6 hours at 10$ = 90$ Conclusion: - = profitable to stay open, fixed (sunk) cost is not relevant. Ticket price: 50: jack buys one week in advance, jill plans to buy on the day of the event. Subway breaks down on the day of the event, jack and jill both face unexpected cost: 75$ for taxis.

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