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01 introduction PPT

Economists want to explain behavior and since

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Unformatted text preview: explicit items can be verified Profit determines people’s behavior. Economists want to explain behavior, and since implicit costs affect people’s behavior, economists use economic costs 10:37:38 21 Economic profit vs. Accounting profit 10:37:38 Pitfall 2: Ignoring Opportunity Costs • It will almost always be instructive to translate questions like economic profit "Should I do x?" into ones like "Should I do x or y?" accounting profit revenue implicit cost opportunity cost explicit cost 10:37:38 explicit cost 22 accounting cost 23 • In the latter question, y is simply the most highly valued alternative to doing x. 10:37:38 24 4 Example 1.10. Should I go skiing today? Example 1.10. Should I go skiing today? • From experience you can confidently say that a day on the slopes is worth $50 to you. • The charge for the day is $30 (which includes bus fare, lift ticket, and equipment). • But this is not the only cost of going skiing. You must also take into account the value of the most attractive alternative you will forego by heading for the slopes. 10:37:38 25 10:37:38 26 Example 1.10. Should I go skiing today? Example 1.10. Should I go skiing today? • Suppose that if you don't go skiing, you will work at your new job as a research assistant for one of your professors. C(x) = cost of skiing plus value of forgone earnings • The job pays $40 dollars per day, and you like it just well enough to have been willing to do it for free. • "Should I go skiing or stay and work as a research assistant?" 10:37:38 = $30 + $40 = $70 B(x) = $50 < C(x), So don't go skiing. 27 10:37:38 28 Remark #1 Project A: benefit (A) > cost (A) ?? 彐 Surplus (A) > 0 Project B: benefit (B) > cost (B) ?? 彐 Surplus (B) > 0 Cost measurements Project C: benefit (C) > cost (C) ?? 彐 Surplus (C) > 0 Project D: benefit (D)...
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