Cost-Benefit Analysis - AP Microeconomics
- If costs are $500 and benefits are $450, should you proceed?
- No, since costs exceed benefits. Negative net benefit means the decision destroys value.
- Calculate net benefit with costs of $250 and benefits of $325.
- Net Benefit = $75. Net benefit calculation: $325 - $250 = $75.
- Find the net benefit: costs $400, benefits $600.
- Net Benefit = $200. Simple subtraction: $600 - $400 = $200.
- Identify the opportunity cost in choosing to study over work.
- Income from work. Studying foregoes potential income from working.
- Which concept describes the time value of money?
- Present value. Accounts for earning potential of money over time.
- Define indirect cost.
- A cost not directly attributable to a specific activity. Must be allocated across multiple activities or products.
- What is a marginal cost?
- The cost of producing one more unit of a good. Essential for optimal production and pricing decisions.
- What does it mean if net benefit is positive?
- The benefits outweigh the costs of the decision. Indicates the decision creates economic value.
- Calculate present value: $1000 in 2 years at 5% interest.
- $PV = \frac{1000}{(1.05)^2} = 907.03. Use the present value formula with given parameters.
- State the formula for calculating present value.
- . Discounts future value using interest rate and time period.
- What is a sunk cost?
- A cost that has already been incurred and cannot be recovered. Should be ignored in future decision-making processes.
- What is the outcome if marginal cost is $20 and benefit is $25?
- Proceed, benefit exceeds cost. Marginal benefit exceeds marginal cost, creating value.
- What is the opportunity cost?
- The value of the next best alternative foregone. Key concept for measuring true cost of any decision.
- Calculate net benefit if benefits are $1000 and costs are $700.
- Net Benefit = $300. Apply the formula: Net Benefit = Benefits - Costs.
- Which term describes non-monetary benefits?
- Intangible benefits. Benefits that cannot be easily measured in monetary terms.
- State the formula for calculating net benefit.
- Net Benefit = Total Benefits - Total Costs. Standard formula to measure economic efficiency of decisions.
- What is the result of $800 benefit and $900 cost?
- Net Benefit = -$100. Negative net benefit indicates costs exceed benefits.
- Identify the primary goal of cost-benefit analysis.
- To determine if benefits exceed costs of an action. Fundamental decision-making criterion in economics.
- What is the purpose of a discount rate?
- To calculate the present value of future cash flows. Converts future money values to today's equivalent value.
- Which cost is associated with lost potential gain?
- Opportunity cost. Represents the true economic cost of any choice.
- What is the sunk cost in a scenario where $300 is spent and non-refundable?
- $300. Non-refundable expenses are classic sunk costs.
- Which analysis compares marginal costs and benefits?
- Marginal analysis. Decision-making tool for incremental choices.
- Which decision follows if marginal benefit exceeds marginal cost?
- Proceed with the decision. Efficient allocation occurs when marginal benefit exceeds marginal cost.
- Identify the concept of diminishing marginal returns.
- Decreasing additional output with additional input. Explains why production efficiency eventually decreases.
- Choose the correct decision: costs $300, benefits $400.
- Proceed, benefits exceed costs. Positive net benefit of $100 justifies proceeding.
- If cost is $100 and benefit is $150, what is net benefit?
- Net Benefit = $50. Basic net benefit calculation: .
- If the decision improves productivity, what benefit type is it?
- Intangible benefit. Productivity improvements are non-monetary intangible benefits.
- What is the decision rule in cost-benefit analysis?
- Proceed if benefits exceed costs. Basic principle for efficient resource allocation.