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Its the sum of explicit cost and implicit cost
actual outlay of money
forgone value of best alternative activity
business's revenue minus explicit costs and depreciation
business's revenue minus Opp Cost of its resources
- Relevant to "how much" decisions
- Its an analysis at edge, comparing additioal benefit to additional cost of one more unit of consumption (or production)
the additonal benefit earned by consuming (producing) one more unit of g/s
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.
the additonal cost incurred by consuming (producing) one more unit of g/s
- 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.
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)
- 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
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