1.5 Cost-Benefit Analysis

a. Define opportunity cost. b. Explain the opportunity costs associated with choices. c. Calculate the opportunity costs associated with choices.

• Rational agents consider opportunity costs, whether implicit or explicit, when calculating the total economic costs of any decision.
• Total benefits form the metric “utility” for consumers and total revenue for firms.
• Enduring understanding CBA-1: Rational economic decisions require the evaluation of costs and benefits.

a. Explain a decision by comparing total benefits and total costs (using a table or a graph when appropriate). b. Calculate total benefits and total costs (using a table or graph where appropriate).

• Total net benefits, the difference between total benefits and total costs, are maximized at the optimal choice.
• Some decisions permit rational agents to look at only marginal benefit and marginal cost. Other decisions cannot be broken down into increments in this way and must be evaluated by looking at total benefits and total costs.
• Enduring understanding CBA-1: Rational economic decisions require the evaluation of costs and benefits.