lecture4 - benefits and costs

lecture4 - benefits and costs - Topic 3: Balancing benefits...

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Topic 3: Balancing benefits and costs USC Marshall
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Balancing benefits and costs • Principles of optimization – How to maximize or minimize a function ow optimization relates to individual choice How optimization relates to individual choice – When a decision problem is framed right, it almost always comes down to maximizing net benefit (total benefit minus total cost) • The concepts of – Marginal benefit and marginal cost USC Marshall – Opportunity cost
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Balancing benefits and costs • Example: You need to decide how much time to devote to studying for this course. Assume that we can attach a monetary value to the time/day you devote to the course as follows: Hours Invested 0 123 4 5678 9 Total 5 8 9 8 5 0 3 4 3 • If you have nothing else to do, how many Benefit 0 15 28 39 48 55 60 63 64 63 hours/day should you study? USC Marshall
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Balancing benefits and costs • Example: You need to decide how much time to devote to studying for this course. Assume that we can attach a monetary value to the time/day you devote to the course as follows: Hours Invested 0 123 4 5678 9 Total 5 8 9 8 5 0 3 4 3 • If you have nothing else to do, how many Benefit 0 15 28 39 48 55 60 63 64 63 hours/day should you study? USC Marshall
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Balancing benefits and costs • In all likelihood, you do have something else to do in addition to studying for this course. Suppose that each hour you do not study, you engage in more fun activities, and you attach a monetary value of $6 to each hour you spend not studying. – This value captures the opportunity cost of your me time • How many hours should you study now? USC Marshall
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Balancing benefits and costs ours otal Hours studying Total Benefit Cost 0 00 5 1 15 6 2 28 12 3 39 18 4 48 24 5 55 30 6 60 36 7 63 42 8 64 48 USC Marshall 9 63 54
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Balancing benefits and costs ours otal et Hours studying Total Benefit Cost Net Benefit 0 000 5 1 15 6 9 2 28 12 16 3 39 18 21 4 48 24 24 5 55 30 25 6 60 36 24 7 63 42 21 8 64 48 16 USC Marshall 9 63 54 9
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Balancing benefits and costs ours otal et Hours studying Total Benefit Cost Net Benefit 0 000 5 1 15 6 9 2 28 12 16 3 39 18 21 4 48 24 24 5 55 30 25 6 60 36 24 7 63 42 21 8 64 48 16 USC Marshall 9 63 54 9
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Balancing benefits and costs • Alternative approaches? – Use marginal analysis Marginal benefit: The increase in total benefit g resulting from increasing time invested by one hour Marginal cost: The increase in total cost resulting from increasing the time invested by one hour USC Marshall
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Balancing benefits and costs ours otal arginal arginal Hours studying Total Benefit Cost Marginal Benefit Marginal Cost 0 00 5 1 15 6 2 28 12 3 39 18 4 48 24 5 55 30 6 60 36 7 63 42 8 64 48 USC Marshall 9 63 54
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Balancing benefits and costs ours otal arginal arginal Hours studying Total Benefit Cost Marginal Benefit Marginal Cost 0 00 5 1 15 6 6 2 28 12 6 3 39 18 6 4 48 24 6 5 55 30 6 6 60 36 6 7 63 42 6 8 64 48 6 USC Marshall 9 63 54 6
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This note was uploaded on 03/09/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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lecture4 - benefits and costs - Topic 3: Balancing benefits...

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