AP Microeconomics AMSCO Guided Notes
1.5: Cost-Benefit Analysis
AP Microeconomics Guided Notes
AMSCO 1.5 - Cost-Benefit Analysis
Essential Questions
- How can you evaluate costs and benefits to make rational economic decisions?
I. Opportunity Costs and Choices
1. What is cost-benefit analysis and why is it useful for making economic decisions?
2. How do psychic benefits influence economic decisions, and why are they difficult to quantify?
A. Examples of Cost-Benefit Analyses
1. What are the costs and benefits in the student T-shirt business example, and what decision did the student make?
2. How do the sandwich shop and community sidewalk examples demonstrate that cost-benefit analysis involves trade-offs between different opportunities?
B. Rational Agents
1. What is a rational agent and what assumption did economists traditionally make about how people make economic decisions?
2. What is hyperbolic discounting and how does it demonstrate that people do not always make rational economic choices?
C. Explicit and Implicit Opportunity Costs
1. What is the difference between explicit opportunity costs and implicit opportunity costs?
2. In the basketball camp example, what are the explicit and implicit opportunity costs, and what is the total opportunity cost of attending?
3. Why is it important for rational agents to consider both explicit and implicit opportunity costs when making decisions?
D. Measuring Utility
1. What is utility and why is it difficult to measure accurately?
2. How do economists and businesses track utility when it is so subjective?
E. Total Benefits
1. How do total benefits differ for consumers versus businesses?
2. What are total costs for individuals and for businesses, and how do they relate to total benefits in cost-benefit analysis?
II. Maximizing Total Net Benefits
A. Comparing Total Benefits and Total Costs
1. What is optimal choice and why is it important to consider both total benefits and total costs when making economic decisions?
2. In the cardboard box business example, why does producing more boxes not always lead to greater net benefits?
B. Calculating Total Net Benefits
1. What is total net benefit and how is it calculated?
2. In the box factory example, at what production level is total net benefit maximized, and what does this represent?
3. Why might total net benefits decrease when production becomes too high?
C. Marginal Benefits and Marginal Costs
1. What does margin mean in economics, and how do marginal benefits and marginal costs differ from total benefits and total costs?
2. What are the formulas for calculating marginal benefit and marginal cost?
3. According to the benefit-maximizing rule, when should a business increase output, maintain output, or reduce output?
4. In the box factory example, why is producing 17 boxes the optimal choice based on the relationship between marginal benefits and marginal costs?
Key Terms
opportunity costs
cost-benefit analysis
rational agents
explicit opportunity costs
implicit opportunity cost
utility
total benefits
total costs
total net benefits
optimal choice
marginal benefit
marginal cost