Chapter 1

Economists believe the Cost-Benefit Principle is:

a simple but useful model of how people should make choices.

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry's opportunity cost of attending Elite U is:

If Larry attends Elite U, he not only has to pay $50,000 in out-of-pocket expenses, but he also has to give up the value his next-best option. To determine the value of his next best option, note that the value to Larry from attending State College (net of tuition) is $40,000 - $20,000 = $20,000. And, his value from attending NoName U (net of tuition) is $15,000 - 0 = $15,000. So going to State College is his next best option, and his opportunity cost of going to Elite U is $50,000 + $20,000 = $70,000.

Josh wants to go to the football game this weekend, but he has a paper due on Monday. It will take him the whole weekend to write the paper. Josh decides to stay home and work on the paper. According to the Scarcity Principle, the reason Josh doesn't go to the game is that:

Josh can't go the game and finish the paper.

The marginal cost of the 4th unit of activity is: Picture

Learn to do this through tables

You paid $35 for a ticket (which is non-refundable) to see SPAM, a local rock band, in concert on Saturday. Assume that $35 is the most you would have been willing to pay for a ticket. Your boss called, and she is looking for someone to cover a shift on Saturday at the same time as the concert. You would have to work 4 hours and she would pay you $11/hr. The psychic cost to you of working is $2/hr. Should you go to the concert instead of working Saturday?

No, the benefit of going to the concert is less than the cost.

All else equal, relative to a person who earns minimum wage, a person who earns $30 per hour has:

a higher opportunity cost of taking the day off work.

Choosing to study for an exam until the extra benefit (e.g., improved score) equals the extra cost (e.g., the value of foregone activities) is:

an application of the Cost-Benefit Principle.

The Cost-Benefit Principle indicates that an action should be taken if:

its extra benefit is greater than or equal to its extra cost.

According to the Cost-Benefit Principle, you should go see the latest Star Wars movie with your friends this week-end if:

the extra benefits of seeing the movie are greater than the extra costs of seeing the movie.