Cost-Benefit Principle
You’re deciding whether to buy a $4 coffee. If the benefit you expect is worth $5, should you buy it?
Yes, benefit $5> cost $4
You decide to watch a movie instead of doing homework. What’s your opportunity cost?
Time/grade improvement lost
You can earn $15 per hour tutoring. You already plan to tutor 2 hours, but your friend asks you to tutor an extra hour. The extra hour will give you $15, but costs you $10 in missed study time. Should you tutor the extra hour?
Yes, because the marginal benefit ($15) > marginal cost ($10).
A small coffee shop raises the price of lattes. How might this affect the demand for nearby pastries?
If lattes and pastries are complements, demand for pastries may decrease. This shows interdependence between related markets.
At equilibrium, what equals what?
Quantity demanded = Quantity supplied
A student considers joining a club that costs $30 but provides $50 worth of networking opportunities. Rational?
Yes, benefit $50> cost $30
You paid $200 for a non-refundable weekend trip, but halfway through, severe weather makes it unsafe to continue. Should you keep going just because you already paid? Why or why not?
No, the $200 is a sunk cost and cannot be recovered. The rational decision should consider current and future costs and benefits, not money already spent.
You are selling handmade bracelets. Making 5 bracelets costs $25, and making 6 bracelets costs $28. Each bracelet sells for $6. Should you make the 6th bracelet?
Yes, because the marginal benefit ($6) > marginal cost ($3).
A new coffee shop opens next to a donut shop. How might this affect the demand for donuts?
If coffee and donuts are complements, demand for donuts may increase, demonstrating interdependence.
If demand for coffee increases but supply stays the same, what happens to equilibrium price?
It rises.
A student considers working 10 extra hours at $15/hour but will miss a concert ticket worth $120. Should they work?
Yes, benefit $150 > cost $120
A country can produce either 100 tons of wheat or 50 tons of corn. If it produces 50 tons of wheat, what is the opportunity cost?
25 tons of corn
You’ve eaten 3 slices of pizza. The 4th slice gives less satisfaction. What concept explains this?
Diminishing marginal benefit.
A smartphone company needs 1,000 microchips to build its phones. Due to a flood, the microchip factory can only supply 800. The price of microchips rises from $50 to $70 each. How does this affect the smartphone market?
The interdependence of markets means higher microchip costs increase smartphone production costs, likely raising phone prices and reducing quantity supplied.
If the price of apples is above equilibrium, what happens?
Surplus → prices fall.
A company must spend $2,000 to upgrade software but will save $2,500 in efficiency. Should they do it?
Yes, benefit $2,500> cost $2,000
Country A can produce either 40 planes or 200 cars. If it increases plane production from 20 to 30, it must reduce car production from 150 to 100. What is the opportunity cost of producing 10 more planes?
50 cars
You bake 10 cookies and sell them for $2 each. Baking an 11th cookie costs $2.50 in ingredients. Should you bake it?
No, because the marginal cost ($2.50) > marginal benefit ($2).
A drought reduces wheat supply. How does this affect the price of bread and the quantity demanded?
Bread price rises, quantity demanded falls; this shows supply shocks affect related markets.
A sudden increase in supply of laptops shifts the equilibrium how?
Lower price, higher quantity.
A business spends $1,000 on advertising and earns $1,200 in additional revenue. Explain if this is a rational decision.
Yes, benefit $1,200 > cost $1,000
A farmer has 10 acres of land. On one acre, they can grow either 100 pounds of apples or 40 pounds of peaches. If the farmer chooses to plant all 10 acres with apples, what is the opportunity cost in terms of peaches?
400 pounds of peaches
A factory produces 200 gadgets at a total cost of $5,000. Producing 201 gadgets increases total cost to $5,020. The 201st gadget can be sold for $18. Should the factory produce it?
Since marginal benefit ($18) < marginal cost ($20), the factory should not produce the 201st gadget.
Steel price rises from $500 to $700 per ton. Car manufacturers need 50 tons per plant. How does this affect car production, car prices, and demand for substitutes like motorcycles?
Car production costs rise → supply decreases → car prices rise → some demand shifts to motorcycles, showing interdependence.
Rent control keeps apartment prices below equilibrium. What’s the result?
Shortage of apartments.