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Mpp#003+benefit.versus.cost.(19)
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Mpp#003+benefit.versus.cost.(19)

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  • 1. Benefit/Cost Analysis “Things don’t have costs ~ choices do”Lesson 2: Benefit/Cost Analysis 09/28/2000 1
  • 2. Benefit/Cost Analysis 1. Identify the goal and the resources available to reach that goal. 2. Identify alternative uses of the resources to achieve the goal. 3. Evaluate the advantages and disadvantages of each alternative use of the resources. 4. Select the best alternative, recognizing that alternative as the choice and the best alternative not chosen as the opportunity cost. 5. Re-evaluateLesson 2: Benefit/Cost Analysis 09/28/2000 2
  • 3. Benefit/Cost Analysis The Grid 1. Identify goal/decision 2. Find and list alternatives 3. Consider the criteria and use the criteria to evaluate the alternatives -- advantages and disadvantages of each alternative 4. Choose 5. Re-evaluateLesson 2: Benefit/Cost Analysis 09/28/2000 3
  • 4. Goal: Select a College Affordable Fun Location Quality Prestige Acceptance CSUSB ++ + - +++ + Local Community College +++ - + +++ Berkeley -- +++ ++ +++ +++ - UCSD - ++ +++ ++ ++ -Lesson 2: Benefit/Cost Analysis 09/28/2000 4
  • 5. Select a CareerLesson 2: Benefit/Cost Analysis 09/28/2000 5
  • 6. Goal: Career Decent More Salary Training Fulfilling Interesting Total Hair + - + ++ +++ Dresser Fast Food -- ++ -- -- ---- Legal Assistant +++ -- ++ + ++++ School ++++ Aide ++ - +++ +++ +++Lesson 2: Benefit/Cost Analysis 09/28/2000 6
  • 7. Select a Career OPPORTUNITY COST CHOICELesson 2: Benefit/Cost Analysis 09/28/2000 7
  • 8. Goal: Select a Major Lead to How much Necessary Classes Like it? job? school? skills? available? English History Math EconomicsLesson 2: Benefit/Cost Analysis 09/28/2000 8
  • 9. Possible Liver Recipients 1. A 15 year old girl from India. She has excellent health with the exception of a failing kidney. Her parents are well-educated and quite wealthy. They are major philanthropists who have contributed big bucks to educational institutions in India. They are willing to pay for all medical expenses and to make a major donation to the hospital that performs the transplant. 2. A 30 year old construction worker. He has no other health problems. He is the father of two children. He and his wife scrape by on one salary. She stays home with the children who are 5 and 7 years old. His health insurance will pay a small part of the expenses of the operation. 3. A 55 year old college minister, beloved by her congregation, good health except for the liver problem, low income, no health insurance, congregation has organized a pledge drive to secure funds, won’t come close to covering costs of operation. 4. A 65 year old Latin leader who has won the Nobel Peace Prize for bringing order and democracy to his formerly war torn nation. Good health, family of four, government will pay all medical costs. 5. A retired and beloved baseball player. 66 years old. Has struggled with alcohol problems most of his life. Could pay a small portion of the costs of the medical costs.Lesson 2: Benefit/Cost Analysis 09/28/2000 9
  • 10. Goal: Allocate a Liver Indian Girl Const Worker College Minister Latin Leader BBall PlayerLesson 2: Benefit/Cost Analysis 09/28/2000 10
  • 11. Benefit/Cost Analysis The Apron What resources, what goal? Alternative resource allocations Advantages and disadvantages of alternatives Choice Opportunity costLesson 2: Benefit/Cost Analysis 09/28/2000 11
  • 12. Lesson 2: Benefit/Cost Analysis 09/28/2000 12
  • 13. Benefit/Cost analysis involves the search for all alternatives.Lesson 2: Benefit/Cost Analysis 09/28/2000 13
  • 14. Solomon Three AlternativesLesson 2: Benefit/Cost Analysis 09/28/2000 14
  • 15. Choosing among alternative resource use Use resources to preserve tortoise or raven? Use land to preserve wildlife or provide recreation? Use water for gold mining or agriculture? Use land in Egypt to preserve monuments or provide water for food?Lesson 2: Benefit/Cost Analysis 09/28/2000 15
  • 16. Alternative allocations of your money (embedded human capital) Eat at home or eat out? What video? School books or entertainment? Brand name or generic shoes?Lesson 2: Benefit/Cost Analysis 09/28/2000 16
  • 17. Alternative allocations of your human capital Study or sleep? Golf or tennis? Work or school? Going to the prom with Gary or William?Lesson 2: Benefit/Cost Analysis 09/28/2000 17
  • 18. The importance of alternatives Power – an impressive list of alternatives in terms of quantity and quality Poverty – few good alternatives Your job in school – build your human capital so that you will have powerLesson 2: Benefit/Cost Analysis 09/28/2000 18
  • 19. Rationality and Self-Interest versus Selfishness If you have a goal, economic reasoning can help you.Lesson 2: Benefit/Cost Analysis 09/28/2000 19