not zero since you could sell it or rent it out Example the EC of studying is

not zero, since you could sell it or rent it out − Example: the EC of studying is not zero, since you give up socializing • What is it exactly? Value of next best alternative use. • What are they for the examples above? • How do you figure them out?

Accounting Cost of Full-Time MBA 2018-19 Estimated Cost of Attendance 3 Quarters (9 months) Tuition $72,000 (10 courses) Fees $75 + $1,209 + $2,500 = $3,784 Health Insurance $4,500 Books $684 Room and Board $22,185 Personal $2,286 Transportation $1,944 Computer Allowance $1,300 Total $108,683

Questions 1. Are all of these costs economic costs? 2. Is anything missing? What opportunity costs do you face?

Economic Cost of Full-Time MBA 2017-18 Estimated Cost of Attendance 3 Quarters (9 months) Tuition $72,000 (10 courses) Fees $75 + $1,209 + $2,500 = $3,784 Health Insurance $0 Books $684 Room and Board $0 Personal $0 Transportation $0 Computer Allowance $1,300 Foregone Earnings $100,000? Total Economic Costs $177,768

Predictions • Do prospective MBA students consider foregone salary as an important cost? • How would we know? What would we look for in the data?

MBA Applications & the Business Cycle

Profits, equilibrium, and “no arbitrage”

If we measure costs “correctly” how profitable do we expect firms to be? • In previous examples, we saw that the scarcity which generates profits can go away, and with, so does the profits • If scarcity is the result of optimizing agents (firms, consumers) making choices, and we account for the costs of those choices correctly (only opportunity costs matter), what profits do we expect to see in “equilibrium”?

Equilibrium • Definition we’ll generally use in the first half of this class: − Firms earn zero economic profits ( ZEP ) in equilibrium − By economic profits we mean those defined by opportunity costs/benefits, as opposed to accounting costs/benefits − By equilibrium we mean after firms and consumers have had a chance to make optimizing, or rational, choices • Note: you will hear this called a no arbitrage condition

Equilibrium: an example • Example: you inherit an oil field − What are the accounting profits? … § Discounted future sales – expenses = $1 million − What is opportunity cost? − What is economic profit? • What are the economic profits from owning NYC real estate? Houston real estate? Taxi medallions? • If the market for assets is working, and agents use those assets efficiently, these ought to be zero

Punchline

Recap • Benefits are not only revenues, costs are not only dollars • Relevant measure is economic profits, relative to whatever objective function your organization has − Need to “account for” opportunity costs • Markets are always tending towards an equilibrium (recall: zero economic profits!) − Prices of assets should reflect opportunity costs − Economic profits should be zero − Scarce and valuable assets will earn rents