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Lecture

ECO100Y1 Lecture Notes - Sunk Costs, Marginal Cost, Marginal Utility


Department
Economics
Course Code
ECO100Y1
Professor
James Pesando

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ECO100: LECTURE #2
14/09/11
OPPORTUNITY COST REVIEW:
You decide to go out for dinner which costs $100. You value the dinner at $200.
Your next best alternative is to attend a concert, which you value at $75. The cost of a ticket to the concert is $50.
1. What is the opportunity cost of going out to dinner?
a) $25
b) $50
c) $75
d) $125
e) none of the above
2. What is the opportunity cost if you value the dinner at $400?
a) $25
b) $50
c) $75
d) $125
e) none of the above
Answer:
Action taken: $100 (direct cost)
Next best alternative: 75
Less: Direct cost of next best alternative: (50)
$125 (for both questions)
Observation: the value that you assign to the dinner is irrelevant to its opportunity cost.
RATIONAL DECISION MAKING
Undertake activity if marginal (additional) benefit exceeds marginal (additional) cost
Insights
1. Include all opportunity costs
2. Ignore sunk costs: (“fixed costs”) costs which are incurred whether or not action is taken
i. Only relevant costs are those which can be avoided if action is not taken.
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