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Study Guide

[ECON 200] - Final Exam Guide - Comprehensive Notes for the exam (40 pages long!)


Department
Economics
Course Code
ECON 200
Professor
Robert Schwab
Study Guide
Final

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UMD
ECON 200
FINAL EXAM
STUDY GUIDE

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ECON 200
9/1/16
Choices & Rational Behavior
Economists always assume that people:
Compare all available choices
Purposefully behave in the way that will best achieve their goals, call rational
behavior.
However, people don’t always act rationally!
Rational behavior suggests that people compare the additional benefits of a choice against
the additional costs.
Comparing additional benefits and costs of a choice is called marginal decision making
or thinking at the margin.
Total Benefits & Total Costs
Total Benefits Total Costs
Firm Total Revenue Total Cost of Production
US EPA Total Benefit from Reducing Pollution Total Abatement Cost
Consumer Total Value of the Goods You Consume Total Cost of the Goods You Consume
*The key is to try to maximize the difference between the total benefits and the total costs.
Marginal Benefits & Marginal Costs
Marginal changes are small incremental changes to a plan of action.
Marginal Benefits Marginal Costs
Firm Additional revenue from selling one more
gallon of gas
Additional cost of producing one more
gallon of gas
US EPA Additional benefit from eliminating one
more ton of pollutants
Additional cost of eliminating one
more ton of pollutants
Consumer The value to you from owning one more
DVD
The cost of one more DVD
Individuals and firms can make better decisions by thinking at the margin.
A rational decision maker continues to take an action if and only if the marginal benefit of
the action is at least as large as the marginal cost.
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Sunk Cost
A sunk cost is a cost that has already been committed and cannot be recovered.
Ex: once rent is paid, that dollar amount is no longer recoverable - it is 'sunk.'
Opportunity Cost
Opportunity cost is the value of what you have to give up in order to get something.
It is the value of your next best alternative (what you gave up).
Thinking at the Margin – Mathematical Viewpoint
π(Q) = TB(Q) – TC(Q)
dπ(Q*)/dQ = dTB(Q*)/dQ – dTC(Q*)/dQ
= MB(Q*) – MC(Q*)
= 0
Therefore MB(Q*) = MC(Q*)
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