Hours attendedTotal BenefitMarginal Benefit

1
Utility
Hours attended Total Benefit Marginal
Benefit 0 0 ______ 1 400 __
____ 2 700 ______ 3 900 ______
4 1000 ______ 5 1000
2
Costs
Hours attended Total Cost Marginal
Cost 0 0 ______ 1 25 ______
2 75 ______ 3 175 ______ 4
375 ______ 5 1000
3
Benefits and Costs
Hours Attended Net Benefit Total Benefit Total Cost
0 ___ ___ ___
1 ___ ___ ___
2 ___ ___ ___
3 ___ ___ ___
4 ___ ___ ___
5 ___ ___ ___
Marginal Benefit Marginal Cost
___ ___
___ ___
___ ___
___ ___
___ ___
4
Net Benefit Maximizing Rules
1. Net Benefit is the Greatest
Greatest Difference Benefit - Cost
2. Marginal Benefit Marginal Cost
Consume while benefit gt cost
5
1100 1000 900 800 700 600 500 400 300 200 100 0











800 700 600 500 400 300 200 100 0















6
Business Terms
1. Explicit Costs
actual outlays
2. Implicit Costs
owning the resources
3. Normal Profit
entrepreneur's payment
4. Economic Profit
excess profits
7
Measuring Revenues
in the
Chair-Making Business
8
Revenue
Price Quantity Total Marginal Demanded Revenue
Revenue 450 0 0 ______
400 1 _____ ______ 350
2 _____ ______ 300 3
_____ ______ 250 4
_____ ______ 200 5
_____
9
Costs
Quantity Total Cost Marginal
Cost 0 0 ______ 1 250 ____
__ 2 ____ ______ 3 ____ ______
4 ____ ______ 5 ____
10
Revenues, Costs, and Profit
Marginal Revenue Marginal Cost
___ ___
___ ___
___ ___
___ ___
___ ___
Price Quantity Profit Total Revenue Total Cost
450 0 ___ ___ ___
400 1 ___ ___ ___
350 2 ___ ___ ___
300 3 ___ ___ ___
250 4 ___ ___ ___
200 5 ___ ___ ___
11
1400 1200 1000 800 600 400 200 0







300 200 100 0 -100 -200 -300











12
The following table gives the utility points
received by a person from each additional hour of
exercise per week, as well as the points that
each additional hour costs. Using this table,
answer the questions below.
Hours of Exercise Marginal Benefit Total Benefit Marginal Cost Total Cost Net Benefit
0 xxxxx 0 xxxxx 0  
1 60   5    
2 40   10    
3 30   20    
4 20   30    
5 10   40    
6 0   55    
a. Calculate the total benefit and the total cost
of exercising for each of the hours in the
table. b. Calculate the net benefit of exercising
for each of the hours in the table c. How many
hours per week should this person exercise to
maximize satisfaction? d. What is the maximum
number of net benefit points that can be earned
from exercising?
13
Externalities
1. Cost to a third party
sweater factory
beach
brewery
2. Benefit to a third party
14
Externalities or Spillovers

• Externalities exist when the market fails to
  register fully costs and benefits.

• External costs
• When the actions of an individual or group incur
  a cost to 3rd party.
• External benefits
• Present when the actions of an individual or
  group generate benefits for 3rd parties.

15
An External Cost

• All of the costs of production are not considered
• the supply curve understates the true cost of
  production.

• Lower production costs mean more output.
• Too many units are produced.
• Pollution problems are often a side effect.

16
Price
S1
P2
P1
D
Quantity/time
Q1
Q2

• With a negative externality, too many units are
  produced at a price below that which would
  prevail if all costs were identified and factored
  into the market process.

17
An External Benefit

• The demand curve understates the total value of
  the output.

• Units that are more highly valued than their
  costs may not be produced.
• From societys viewpoint, too few units may be
  produced.

18
Price
S1
P2
P1
D1
Quantity/time
Q1
Q2

• With a positive externality, too few units are
  produced at a price below that which would
  prevail if all the benefits were identified and
  factored into the market process.

19
Public Choice
11-4

• Study of economic motives and attitudes of voters
  and public officials in collective decision
  making.
• Maximizing Behavior and the Voting Process
• A persons decision about whether or not to vote
  in an election depends on his or her marginal
  benefit and marginal cost of voting.

20
Public Choice Analysis

• Voter incentives

• Voters support candidates who will provide them
  with the most government services and transfer
  benefits, net of personal costs.
• Rational Ignorance Effect Recognizing their
  vote is unlikely to be decisive, most voters have
  little incentive to obtain information on issues
  and alternative candidates.
• Because of the rational ignorance effect, voters
  will be uninformed on many issues such issues
  will not enter into their decision making process.

21
11-4

• Rational Ignorance
• Choosing to remain uninformed because the
  marginal cost of obtaining the information is
  higher than the marginal benefit from knowing it.
• Special Interest Group
• People who share a common position on a
  particular issue and actively promote that
  position.

22
Public Choice Analysis

• The Politician-Supplier

• Political officials must win elections to be
  successful and achieve their goals.
• Rationally uninformed voters often must be
  convinced to want a candidate.
• Legislative bodies are something like a Board of
  Directors. They
• establish the general direction of policy,
• appoint and supervise bureaucrats who carryout
  the day-to-day operations of government, and,
• set the budgets of agencies and bureaus.

23
1. To maximize satisfaction this person should
consume a. 2.5 units d. anywhere between
1.0 and 6.0 units b. 6.0 units c. more
than 6.0 units.
2. From 0 to 5.0 units consumed, net benefit
is a. increasing. c. increasing and then
decreasing. b. decreasing. d. decreasing
and then increasing.
24
3. When calculating profit accountants
include a. explicit costs. c. explicit
and implicit costs. b. implicit costs. d.
explicit, implicit, and external costs.

• 4. Excess profit is the profit
• necessary to continue a business.
• necessary to recover explicit costs.
• necessary to recover implicit costs.
• d. above what is necessary to continue a
  business.

Quantity Total Revenue
1 200
2 350
3 450
4 500
5. Given this table, what is the marginal revenue
generated when the third unit is sold?
a. 50. b. 100. c. 110.
d. 150.
25
6. An externality is the a. secondary effect of
an action. b. unintended consequence of an
action. c. effect of an action on people or
things that were not involved in the
action. d. unknown consequence of an action on
people or things who were primary parties in the
action.
7. Which of the following is an example of a
positive externality? a. A person paints her
house, which increases the value of her
neighbor's house. b. A firm pays higher prices
for resources, which increases its explicit
costs of production. c. A firm dumps toxic waste
in a river, which causes a community to raise
taxes to clean the water. d. None of the above.
8. Which of these would be most likely to produce
a negative externality? a. exercise. b. foreign
aid. c. air pollution. d. vaccinations.