Sunday, January 9, 2011

Some background for the spreadsheet.

A choice problem is developed where the are two goods. A consumer can buy one unit of either good, buy both, or buy neither. An analysis is gone through to develop the notion "reservation price" which is the most the consumer is willing to pay to purchase a particular good. The reservation price is show to depend on the price of the other good with the dependency one way in the case of substitutes and the dependency the opposite way in the case of complements.

Then the analysis is done on the supply side where it is shown that "opportunity cost" is the analogous notion on the supply side. In this development, sunk cost comes out as natural concept, the cost that is incurred in both cases of a pairwise comparison. Further it is readily apparent how to distinguish opportunity cost from cash outlays and how foregone revenues can be a considerable component of opportunity cost although, again, they are not expenditures on in inputs.

The spreadsheet is developed so a tear sheet can be submitted if one would like to track that the student's have done the work.

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