Micro Chapter 3 Exam 1

  1. Opportunity Cost
    Its the sum of explicit cost and implicit cost
  2. Explicit cost
    actual outlay of money
  3. implicit cost
    forgone value of best alternative activity
  4. Accounting profit
    business's revenue minus explicit costs and depreciation
  5. Economic profit
    business's revenue minus Opp Cost of its resources
  6. Marginal Analysis
    • Relevant to "how much" decisions
    • Its an analysis at edge, comparing additioal benefit to additional cost of one more unit of consumption (or production)
  7. Marginal benefit
    the additonal benefit earned by consuming (producing) one more unit of g/s

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    MB of Babett decreases as the wing-portion size increases since customers are willing to pay less additional amount of money for each additional chicken wing included in the serving.
  8. marginal cost
    the additonal cost incurred by consuming (producing) one more unit of g/s

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  9. Optimal Quantity
    • its the quantity that generates the maximum possibe total net gain
    • and the total et gain i maximized when Marginal Benefit = Marginal
    • Equivalently, it is the quantity at which marginal benefit and marginal cost curves intersect.
  10. Do we care about sunk cost?
    • sunk cost: a cost that has already been incurred and non-recoverable
    • Sunk cost should be ignored in decisions about future actions (opportunity cost)
  11. Present Value
    • What is $X realized t years in the future worth today?
    • $V x (1+r) t = $X
    • $V = $X/ (1+ r)t
    • where $V is the present value f $x realized t years in the future at r, the annual interest rate
  12. Nwt present Value (=NPV)
    NPV of a project is the present value of current and future benefits - the presen value of current and future costs
Card Set
Micro Chapter 3 Exam 1
Opportunity cost/ marginal analysis