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ECO100 - Opportunity Cost - lecture notes.docx

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James Pesando

Sept. 11 2013 Pesando ECO100 Opportunity Cost Continued 1. Benefit of attending university for one year. Individual A: $275,000 B: $150,000 C: $30,000 2. If opportunity cost increases from %15,000 (Sept.2012) to $45,000(Sept.2013), individual will choose NOT to attend university. Observations 1) Opportunity cost is the SAME for A,B, and C. 2) Because of individuals like C, enrollment declined in Sept.2013. Measuring Opportunity cost Action Taken Direct Costs (each dollar spent has opportunity cost of one dollar PLUS Next best alternatives Dollar amount or value assigned by you LESS Direct Costs Rational Decision Making  Undertake activity if Marginal (Additional) benefit exceeds marginal (additional) cost Insights 1. Include all opportunity costs 2. Ignore sunk costs Sunk Costs (“Fixed Costs”)  Costs which are incurred whether or not action is taken Insight Only relevant costs are those which can be avoided if action is not taken 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 ddown on day of event, and Jack and Jill both face unexpected cost : $75 for taxis 4. Should Jack attend event? Should Jill attent event? Answer Jack Should attend MB = 100 MC = 75 MB>MC [ticket price is sunk cost] Jill Should Not attend MB = 100 MC = 75 + 50 = 125 MBMC, so repair the truck Profit: $6,000 – ($5,000 + $3,000) = -$2,000 If do not repair truck, Profit: $0 - $3,000 = -$3,000 Ex: Restaurant should it stay open for lunch? Lease payment: $12,000 per month -> $400 per day Dinn
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