Explicit Costs:
Implicit Costs:
Example 1.2 Should I go skiing or work as a research assistant? *Note: willing to work for free x = go skiing work pays =
Enjoy skiing = bus + ticket + equipment =
B (x) =
C (x) =
Example 1.3 Should I go skiing or scrape plates? *Note: willing to pay $30 to avoid work x = go skiing work pays =
Enjoy skiing = bus + ticket + equipment =
B (x) =
C (x) =
OR
B (x) =
C (x) =
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Example 1.4
Should I work first or go to college first? a) When is the opportunity cost of attending college the least? b) When is the benefit of attending college the greatest?
Lebron James or you
Interest reflects the opportunity cost of money
Example A:
Example B:
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Sunk Cost:
Ignore sunk costs (Fixed Costs, entry / exit SR)
Example 1.5
Should I drive or take bus to Boston (250 miles)?
Indifferent between modes of travel
Choose lower opportunity cost method of travel
Annual Expenses (10,000 miles)
Insurance =
Interest =
Fuel & Oil =
Maintenance =
Total =
C (bus) = ticket price = cost per mile =
C (car) =
OR cost per mile =
C (car) =
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Example 1.6
$5 All-you-can-eat Pizza Experiment Some tables given refund randomly…….
Think on the Margin How much pizza should you eat?
Should the fact that you have paid your tuition for the semester matter in your decision to attend class today?
Buy a CD….robbed or smashed?
Drive to Walmart to save $10….alarm clock ($20) or TV ($1000)?
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External Costs:
Example
If I am an energy-conservation-minded consumer who cannot afford to rent a new car, should I rent a 10-year-old
Buick ($100/yr, 20 mpg) or a 10-year-old Toyota ($300/yr, 40 mpg)?
Choose the car that minimizes your total driving expenses. If all consumers do this, then those that drive the most will choose Toyotas and those that drive the least will choose Buicks.
Assume that gasoline costs $1 per gallon.
Let M = the # of miles driven per year
C = rent + [($1 * M) / mpg)]
C (Buick) =
C (Toyota) =
Cost
800
600
400
200
2,000 4,000 6,000 8,000 10,000 12,000 Miles
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Example 1.11 Burn or Haul leaves?
C (hauling) =
C (burning) =
Smoke Damage =
Cost to society of burning exceeds cost of hauling
Law prohibiting burning leaves……….perhaps a fine for offenders (increase cost of burning)
See also HW questions Problems 11, 12 Example 1.10
Marginal Analysis and phone minutes
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Rationality & Self-Interest
Voting / Politics
Other ideas……
Economic Naturalist Questions
Airline Food….should it be better?
Where are airports and dumps located?
Airport Externalities
Positive and Normative
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