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Opportunity cost

Opportunity cost. Homework Questions. 1.What is another name for Opportunity Cost ? Trade off, Economic Cost, 2.When analyzing Opportunity Costs consumers must consider what two factors ? Benefits and Costs 3.What is a Sunk Cost ?

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Opportunity cost

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  1. Opportunity cost

  2. Homework Questions • 1.What is another name for Opportunity Cost? • Trade off, Economic Cost, • 2.When analyzing Opportunity Costs consumers must consider what two factors? • Benefits and Costs • 3.What is a Sunk Cost? • A cost that must be paid regardless of the choice that is made. • 4.What is an Explicit cost? • Opportunity cost that involves money • 5.What is an Implicit cost? • Opportunity cost that does not involve money

  3. Jim is about to purchase a CD of his favorite singer • Benefit -- hours of pleasure from listening to them • Cost -- price tag it costs $15 • Alternatives • Listen to radio • Download song • Borrow CD • Determine if the benefits exceed the cost

  4. Woman walking along the street when she sees a $1 bill on the sidewalk. Should she pick it up? • Benefit -- $1 richer • Cost – 0 dollars • Alternative – What if the woman is Madonna, and she is hurrying to a recording studio where a symphony orchestra is waiting to perform with her • Determine if the benefits exceed the cost • Do something if it’s benefits outweigh its opportunity costs.

  5. To calculate it ask yourself three questions • What alternative opportunities are there? • Which is the best of these alternative opportunities? • What would I gain if I selected my best alternative opportunity instead of the choice I'm considering?

  6. Jim is about to purchase a CD of his favorite singer • Benefit -- hours of pleasure from listening to them • Cost -- price tag it costs $15 • Alternatives (other ways to spend the $15) • Sunglasses

  7. consider a government proposal to build a new dam Here's how a poor decision-maker might view the problem • "If we build a dam, we'll have better flood control and cheaper electricity. • If we don't, then we'll experience occasional flooding, and electricity will be more expensive."

  8. Here's another way of presenting the problem: "If we build the dam, it will provide us with flood control and cheaper electricity, but it will cost us $100 million."

  9. Here's how an economist would view the problem: "If we build the dam, we'll have flood control and cheaper electricity. But the $100 million to build the dam could be used instead to build two new high schools."

  10. OpportunityCost of Going to a Movie • Time to do homework: 3 hoursGas and parking: $1.50Admission to the theater: $2.00_______________________________________ • Opportunity Cost: 3 hours and $3.50 Notice that Sheila correctly includes gas and parking in her opportunity cost calculations. But what about all the other costs associated with owning a car, like insurance and registration fees? Shouldn't she include them as part of the opportunity cost of going to a movie?

  11. Sunk Costs • The answer is no. If Sheila stayed home, she'd still have to pay the same insurance and registration fees. She can't reduce these costs by staying home. • Ignore sunk costs.

  12. Make a Choice 4 hours good time with friends or 3 hours Celebrating your grandmother’s birthday 9 patients treatment for a year or 9 years free from dialysis for one patient A week of good times with your family or a new roof with a dry house for 20 years

  13. Does anyone feel hungry? 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10

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