Principles_solution_ch1

Principles_solution_ch1 - Problems and Applications 2. When...

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Problems and Applications 2. When the benefits of something are psychological, such as going on a vacation, it isn't easy to compare benefits to costs to determine if it's worth doing. But there are two ways to think about the benefits. One is to compare the vacation with what you would do in its place. If you didn't go on vacation, would you buy something like a new set of golf clubs? Then you can decide if you'd rather have the new clubs or the vacation. A second way is to think about how much work you had to do to earn the money to pay for the vacation; then you can decide if the psychological benefits of the vacation were worth the psychological cost of working. 3. If the choice is between attending the concert and studying tonight, then the cost of attending the concert is the time costs including the cost to you of getting a lower grade in your course. If you are thinking of attending the concert instead of working at your part-time job, the opportunity cost is the wages you are giving up by not working. 4. If you spend $100 now instead of saving it for a year and earning 5 percent interest, you are giving up the opportunity to spend $105 a year from now. The idea that money has a time value is the basis for the field of finance, the subfield of economics that has to do with prices of financial instruments like stocks and bonds. 5. The fact that you've already sunk $5 million isn't relevant to your decision anymore, since that money is gone. What matters now is the chance to earn profits at the margin. If you spend another $1 million and can generate sales of $3 million, you'll earn $2 million in marginal profit, so you should do so. You are right to think that the project has lost a total of $3 million ($6 million in costs and only $3 million in revenue) and you shouldn't have started it. That's true, but if you don't spend the additional $1 million, you won't have any sales and your losses will be $5 million. So what matters is not the total profit, but the profit you can earn at the margin. In fact, you'd pay up to $3 million to complete development; any more than that, and you won't be increasing profit at the margin. 6.
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This note was uploaded on 04/23/2010 for the course ECONOMICS 2312 taught by Professor William during the Spring '09 term at 東京大学.

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Principles_solution_ch1 - Problems and Applications 2. When...

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