Chelsea Katz ECON200 1 29 13 Lecture Notes Classkeeping problem sets will allow you to answer up to three times quizzes are meant to test the video AND the reading mostly video What is on Aplia vs What is on ELMS Aplia pre lecture quizzes problem sets simulations grades on aplia assignments ELMS syllabus schedule pre lecture videos powerpoint slides old exams optional additional reading not essential or required grades on exams and clicker questions When Assignments are due Pre lecture Quizzes 10 45 AM on the day we begin a new module Problem Sets 11 45 PM on Sunday OR 11 45 PM on Thursday Thinking at the Margin Channel 65 on clicker for ECON200 all involve sunk cost Clicker Questions Group that eats more pizza they both ate the same group who didn t get 8 back vs group who did get their 8 back Where would you play tennis outside SUNK COST YOU PAID IT NO MATTER WHAT When would you be more likely to go to the game doesn t matter whether you paid for tickets or got them for free Total Benefits Total Costs Chart MAXIMIZE THE DIFFERENCE BTWN THE TWO Firm US EPA Consumer Total Benefits Total revenue Total benefit from reducing pollution Total value of the goods you consume Total Costs Total cost of production Total abatement cost Total cost of the goods you consume General approach to problems that is very helpful thinking at the margin marginal changes small incremental changes to a plan of action Ex requiring firms to get rid of an additional lb of air pollution Marginal Benefits Marginal Costs Chart NOT TRYING TO MAXIMIZE THE DIFFERENCE BTWN THE TWO Marginal Costs Additional cost of producing one more Marginal Benefits Additional revenue from selling one more gallon of Firm US EPA Consumer gas Additional benefit from eliminating one more ton of pollutants The value to you from owning one more DVD gallon of gas Additional cost of eliminating one more ton of pollutants The cost of one more DVD Individuals and firms can make better decisions by thinking at the margin A rational decision maker continues to take an action IF AND ONLY IF the marginal benefit of the action is at least as large as the marginal cost PUNCHLINE Chart Key MB Marginal Benefit MC Marginal Cost in terms of EPA getting rid of pollution Use the point where the two lines intersect in this example 100 tons of pollution Anything less than 100 tons is a bad idea because asking the firms to get rid of 40 tons because the MB is 12 and the MC is 4 because it is so much greater you can continue going further greatest quantity where MB is ATLEAST as great as MC Don t want to go beyond 100 because MC is greater than MB Sunk cost a cost that has already been committed and cannot be recovered does NOT have to be Sunk costs an Investment Decision o Original Estimate Revenues 9 000 Costs 6 000 Profit 3 000 You start construction and have spent 1 500 this money is sunk cost You now realize that revenues will be just 4 000 Should you continue No because the costs will be greater than the revenue and your profit will be negative You will lose money regardless but you will lose less money if not 1 500 you have already spent is a sunk cost you cannot recover that money At the margin the cost of finishing the project is 6 000 1 500 4 000 The marginal benefit is 4 000 Marginal Cost Marginal Benefit bad reason why you should not continue the proj
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