Chap003 - Chapter 03 Balancing Benefits and Costs Chapter 3...

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Chapter 03 - Balancing Benefits and Costs Chapter 3: Balancing Benefits and Costs Main Concepts and Learning Objectives This chapter focuses on analytical skills that will be used in future chapters. These skills are useful for making decisions that maximize net benefits (i.e. benefits – costs), by: focusing on marginal benefits and costs, and identifying and ignoring sunk costs. Skills needed: This chapter does not use calculus. Instead, it uses logic, tables and graphs. However, students who have completed a calculus course will notice that calculus provides a straightforward explanation for the ideas presented in this chapter. Students who master the material presented in this chapter will be able to: use a graph or table of total benefits and total costs to identify the decision that maximizes net benefits use information about marginal benefits and costs, along with information about sunk costs and avoidable costs to identify the decision that maximizes net benefits. Explain the relationship between sunk costs and avoidable costs. Multiple Choice Quiz (10 questions) covering main points : 1. For students who attend public colleges, the average opportunity cost of foregone wages is: a. less than the cost of college tuition b. more than the cost of college tuition c. equal to the cost of college tuition 2. The info provided in Application 3.1 provides the following assessment of Bill Gates’ decision to drop out of Harvard a. This was a wise decision for Bill Gates because the opportunity cost of attending college exceeded the long-term benefit of attending college. His opportunity cost was high because of his unusual entrepreneurial skill. b. This would probably be a wise decision for most people; statistics show that our society places too much emphasis on education. c. This was an unwise decision. Bill Gates could have started Microsoft after he graduated from college. d. None of the above 3-1
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Chapter 03 - Balancing Benefits and Costs 3. In-text exercise 3.2 provides information about total benefit. Use this information to compute marginal benefits. Which of the following statements is true? a. The marginal benefit of the third quarter hour of repair time is 20. b. The marginal benefit of the fifth quarter hour of repair time is 20. c. The marginal benefit of the second quarter hour of repair time is 20. d. The marginal benefit of the seventh quarter hour of repair time is 20. 4. Application 3.2 focuses on a commuter who is free to choose the number of hours she works each week. She earns a set amount (equal to her wage rate) for each hour she works. When she is not working, she is enjoying leisure activities. Assuming that (i) she is allocating her time optimally and (ii) she does not dislike her work, the “No Marginal Improvement Principle” tells us that: a. Her marginal benefit from leisure activities is equal to her wage rate. b.
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This note was uploaded on 04/06/2011 for the course ECON 3332 taught by Professor Craig during the Spring '11 term at Rensselaer Polytechnic Institute.

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Chap003 - Chapter 03 Balancing Benefits and Costs Chapter 3...

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