ECO101H1 Lecture Notes - Lecture 2: Sunk Costs, Marginal Cost, Marginal Utility
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ECO101H1 Full Course Notes
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Insight: the benefit of the action taken does not influence its opportunity cost. What you forgo by taking the action, as measured by the last alternative plan. Action taken + next best alternatives - direct cost. Direct costs (each dollar spent has dollar amount or value assigned by you opportunity cost of one dollar) Undertake activity if marginal (additional) benefit exceeds marginal (marginal) cost. Ignoring sunk costs ( fixed costs) : cost which are incurred whether or not action is taken, only relevant costs are those which can be avoided if action is not taken example, jack should attend: Mb = 100 mc = 50 mb>mc (the ticket is bought already, should not affect) [for jack, the ticket price is a sunk cost (it is not a price that he can avoid), and does not influence his decision. ] Mb = 100 mc = 75+50 = 125 mb
