Cost-benefit_analysis_and_surplus

Cost-benefit_analysis_and_surplus - • Minimize deaths •...

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Rational Choice Focus on opportunities Realize trade-offs Construct opportunity set Ignore sunk costs Balance costs and benefits Marginal costs and benefits MB = MC Maximize surplus Compare surplus and fixed costs
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Sunk Costs Choice involves alternatives Compare costs of choice and the alternative Costs that are the same for both are sunk Sunk costs are not opportunity costs Sunk costs are not recoverable Ignore sunk costs
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Study Abroad? Cost of going abroad Tuition = $600 Housing = $500 Food and entertainment = $400 Transportation = $800 Cost of staying home Tuition = $600 Housing = $300 or $0? (Can you sublet?) Food and entertainment = $200 Transportation = $0
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How Many Flu Shots Cost-benefit analysis Benefits: fewer deaths due to disease Costs: more deaths due to shots
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Unformatted text preview: • Minimize deaths • Marginal analysis – Compare marginal benefits and marginal costs from additional shots • Surplus – total gain (benefits – costs) % of pop Deaths due MB Deaths due MC to disease to shots 55----10 45 10 20 36 9 1 1 30 28 8 2 1 40 21 7 3 2 50 15 6 5 2 60 10 5 8 3 70 6 4 12 4 80 3 3 17 5 90 1 2 23 6 100 1 30 7 How Many Flu Shots Marginal Costs and Benefits Marginal Benefits Marginal Costs 70% Surplus (Net Gain) Surplus • Surplus = benefits – costs • At 70%, benefits = 55 – 6 = 49 – Costs = 12 • Surplus = 49 – 12 = 37 • Surplus = sum of the (MB – MC) = (10-0) + (9-1) + (8-1) + (7-1) + (6-2) + (5-3) + (4-4) = 37 Surplus Marginal Benefits Marginal Costs Surplus (Net Gain) Right Answer...
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This note was uploaded on 10/17/2011 for the course EC 201 taught by Professor Haider during the Spring '10 term at Michigan State University.

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Cost-benefit_analysis_and_surplus - • Minimize deaths •...

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