L9 - Economics 101:Principles of Microeconomics Professor...

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1 Economics 101:Principles of  Microeconomics Professor Jo Hertel ESA tutoring has started – see webpage Lecture 8: Making decisions – costs and benefits Finding the right costs: Sunk costs Opportunity costs The opportunity cost of time: the concept of present value ‘How much’-decisions: marginal analysis
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2 Sunk costs (1) Optimal decisions are made by weighing benefits and costs appropriately. Obviously, this means we need to identify the right costs (and benefits). For any choice, we include only those costs and benefits we can influence with our choice!
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3 Sunk costs (2) Example in normal decisionmaking: Same principle in economic decisionmaking: University A University B great location boring location GPA = 3.8 GPA = 3.8 high tuition low tuition GPA will be ignored continue with project discontinue project possible benefits of $100 no benefits cost of continuing: $80 no additional costs project has already cost $50 project has already cost $50 The past (sunk) cost will be ignored
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4 Sunk costs (3) Generally: in any decision, ignore costs that are not influenced by that decision if I have already decided to go see some movie, the price of the ticket does not influence my choice of movie Specifically: past costs (“ sunk costs ”) are never influenced by anything and always ignored when I’m sitting in the movie and don’t like it, the ticket I bought does (should) not influence my decision to walk out
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5 Opportunity costs Costs of any activity consist of: explicit cost , for example in production: wages, input costs,... consumption: tuition fees, price of airline ticket... implicit or opportunity cost : the value of the benefits foregone when engaged in that activity production: f.ex. interest that could be collected on the $value of the capital; wages that could be earned by the business owner...
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