Rational_Choice - – Transportation = $800 • Cost of...

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Rational Choice Focus on opportunities Realize trade-offs Construct opportunity set Ignore sunk costs Balance costs and benefits Marginal costs and benefits MB = MC Maximize surplus Compare surplus and fixed costs
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Sunk Costs Choice involves alternatives Compare costs of choice and the alternative Costs that are the same for both are sunk Sunk costs are not opportunity costs Sunk costs are not recoverable Ignore sunk costs
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Study Abroad? Cost of going abroad Tuition = $600 Housing = $500 Food and entertainment = $400
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Unformatted text preview: – Transportation = $800 • Cost of staying home – Tuition = $600 – Housing = $300 or $0? (Can you sublet?) – Food and entertainment = $200 – Transportation = $0 55 10 45 20 36 1 30 28 2 40 21 3 50 15 5 60 10 8 70 6 12 80 3 17 90 1 23 100 30 Surplus • Surplus = benefits – costs • At 70%, benefits = 55 – 6 = 49 – Costs = 12 • Surplus = 49 – 12 = 37 • Surplus = sum of the (MB – MC) = (10-0) + (9-1) + (8-1) + (7-1) + (6-2) + (5-3) + (4-4) = 37...
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This note was uploaded on 04/15/2008 for the course ECON 201 taught by Professor C.liedholm during the Spring '07 term at Michigan State University.

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Rational_Choice - – Transportation = $800 • Cost of...

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