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Cost-benefit_analysis_and_surplus

Cost-benefit_analysis_and_surplus - Cost-benefit analysis...

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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
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Unformatted text preview: Cost-benefit analysis • Benefits: fewer deaths due to disease • Costs: more deaths due to shots • 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 20 36 1 30 28 2 40 21 3 50 15 5 60 10 8 70 6 12 80 3 17 90 1 23 100 30 How Many Flu Shots Marginal Costs and Benefits 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...
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