Chelsea KatzECON2001-29-13Lecture 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 assignmentsELMS: 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**Total Benefits Total CostsFirm Total revenue Total cost of productionUS EPA Total benefit from reducing pollutionTotal abatement costConsumer Total value of the goods you consumeTotal cost of the goods youconsumeGeneral 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 Benefits Marginal CostsFirm Additional revenue from selling one more gallon of Additional cost of producing one moregas. gallon of gas.US EPA Additional benefit from eliminating one more ton of pollutants.Additional cost of eliminating one more ton of pollutants.Consumer The value to you from owning one more DVD.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 MCis 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 Decisiono Original Estimate- Revenues= $9,000- Costs= $6,000- Profit= $3,000You 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 $4,000Marginal Cost > Marginal Benefit= bad/reason why you should not continue the
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