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Jan 20 (week two)

# Jan 20 (week two) - EC 201 Office Hours changed Tuesday 2-3...

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EC 201 January 20, 2009 Office Hours changed: Tuesday: 2-3 Wednesday: 1-2 Last Week Review: Microeconomics= the study of how individuals make decisions and how those decisions interact with each other Why have to make decisions? = resources are limited Opportunity Cost = the thing that you have to give up in order to get what you want Marginal Analysis = maximize economic surplus = (total benefit) – (total cost) Set marginal benefit = marginal cost Cost-Benefit Analysis FDA approves medicines before they are used. o Longer approval times save health care costs from dangerous medicines o Longer approval times hurt patients who really need medicine o Assume that costs-benefits are as given below: Delay Total Benefit Marginal Benefit Total Cost Marginal Cost 1 92 n/a 20 n/a 2 110 18 (110-92) 30 10 (30-20) 3 126 16 (126-110) 42 12 (42-30) 4 140 14 (140-126) 56 14 (56-42) 5 152 12 (152- 140) 74 18 (74-56) 1. Find Marginal cost and marginal benefit 2. What is the optimal delay? 3. What is total economic surplus at 4 weeks? a. Total Benefit- Total Cost b. 140-56 c. economic surplus = 84 4. What if we maximize total benefit instead? a. 152-74 = 78 b. 78<84 Model: Simplified representation of reality that is used to better understand real-life situations Allow us to focus on the effects of only one change at a time Sets all other things equal = ceterus paribus Thought experiments asking….”What if?” Production Possibilities Frontier A graph of the combinations of 2 goods that can be produced with the given resources Production Per Week

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A: Feasible but inefficient B: Unattainable C: Feasible and efficient Efficiency: there are no missed opportunities There is no way to get more of one thing without giving up another Opportunity Cost
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