Lecture 11 &12 Flashcards
What is Decision Type 1: Either/Or?
Choosing between two decisions such as go to college or work.
What is the moral for Decision Type 1: Either/Or?
Choose the one that has the greatest economic profit (worry about implicit costs).
What is Decision Type 2: How Many/How Much?
Marginal Benefit and Marginal Cost
“How much” choices made on the margin that can be either marginal benefit or marginal cost.
How do you define Marginal Benefit (MB)?
Additional benefit you get from one more unit (good/service)
MB=max WTP for next unit
How do you define Marginal Cost (MC)?
What you have to give up (additional cost) for one more unit (good/service).
What is the moral for Decision Type 2: How Many/How Much?
Increase quantity until MB of next unit ≥ MC of next unit. It’s okay if MB=MC.
Why is Marginal Benefit usually decreasing?
If you keep watching your favorite movie, there is less benefit and may go negative.
What are the formulas for Total, Marginal, and Average Benefits?
- Marginal Benefit = ∆TB caused by next unit
- Total Benefit = sum of the MB of every unit you consume
- Average Benefit = TB/Q
What are the common questions for Total, Marginal, and Average Benefits?
How much better off…?
Marginal Cost can be?
Increasing, Decreasing, or Constant
What are the common questions for Total, Marginal, and Average Cost?
How much do I have to pay…?
What are the formulas for Total, Marginal, and Average Costs?
- Marginal Cost = ∆TC caused by next unit
- Total Cost = sum of the MC of every unit you consume
- Average Cost = TC/Q
How do you graph marginal values?
Draw a line through the marginal values between the quantity points.
What is Decision Type 3: Sunk Costs?
Sunk costs have been spent, cannot be recovered, and should be ignored in future marginal decisions.
What are explicit and implicit costs?
Explicit: Cost that requires the layout of money.
Implicit: Dollar value of benefits foregone because of choice.
