BenefitCost Analysis

1
Benefit/Cost Analysis

• Things dont have costs
• choices do.

2
Benefit/Cost Analysis

• Identify the goal and the resources available to
  reach that goal.
• Identify alternative uses of the resources to
  achieve the goal.
• Evaluate the advantages and disadvantages of each
  alternative use of the resources.
• Select the best alternative, recognizing that
  alternative as the choice and the best
  alternative not chosen as the opportunity cost.
• Re-evaluate

3
Benefit/Cost AnalysisThe Grid

• Identify goal/decision
• Find and list alternatives
• Consider the criteria and use the criteria to
  evaluate the alternatives -- advantages and
  disadvantages of each alternative
• Choose
• Re-evaluate

4
Goal Select a College
Prestige
Location
Quality
Acceptance
Fun
Affordable




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CSUSB
Local Community College


-

--




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Berkeley
-



-

UCSD
5
Select a Career
6
Goal Career
Decent Salary
More Training
Total
Fulfilling
Interesting
Hair Dresser


-


Fast Food
--
--
--

----
Legal Assistant


--



School Aide



-
7
Select a Career
OPPORTUNITY COST
CHOICE
8
Goal Select a Major
How much school?
Necessary skills?
Classes available?
Lead to job?
Like it?
English
History
Math
Economics
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10
Goal Allocate a Liver
Indian Girl
Const Worker
College Minister
Latin Leader
Sales Rep
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Benefit/Cost AnalysisThe Apron

• What resources, what goal?
• Alternative resource allocations
• Advantages and disadvantages of alternatives
• Choice
• Opportunity cost

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Benefit/Cost analysis involves the search for all
alternatives.
14
Solomon
Three Alternatives
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?

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?

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Alternative allocationsof your human capital

• Study or sleep?
• Golf or tennis?
• Work or school?
• Go to prom with Gary or William?

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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 power

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Rationality and Self-interest vs. Selfishness

• If you have a goal, economic reasoning can help
  you.