Chap001.2 - across town? How much would someone have to pay...

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2 Chapter 1: Thinking Like an Economist Slide 7 Applying The Cost-Benefit Principle ± Rational Person z Someone with well-defined goals who tries to fulfill those goals as best he or she can. Chapter 1: Thinking Like an Economist Slide 8 Applying The Cost-Benefit Principle ± Economic Surplus z The benefit of taking any action minus its cost. z The goal of economic decision makers is to maximize their economic surplus. Chapter 1: Thinking Like an Economist Slide 9 Applying The Cost-Benefit Principle ± Opportunity Cost z The value of the next-best alternative that must be forgone to undertake an activity. ± Key is to correctly recognize what taking a given action prevents us from doing. Chapter 1: Thinking Like an Economist Slide 10 Applying The Cost-Benefit Principle ± What costs are involved in driving
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Unformatted text preview: across town? How much would someone have to pay you to drive across town? Chapter 1: Thinking Like an Economist Slide 11 Four Important Decision Pitfalls Pitfall 1: Measuring cost and benefits as proportions rather than absolute dollar amounts. z Examples Would you drive across town to save $10 on a $20 DVD? To save $10 on a $2,020 laptop computer? Which is more valuable, saving $100 on a $2,000 plane ticket to Tokyo or saving $90 on a $200 plane ticket to Chicago? Chapter 1: Thinking Like an Economist Slide 12 Four Important Decision Pitfalls Pitfall 2: Ignoring Opportunity Costs z Example: Should you go to graduate school? What are the costs? What is the next best alternative?...
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This note was uploaded on 02/20/2012 for the course ECON 202 taught by Professor Brightwell during the Spring '08 term at Texas A&M.

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