1.5 Cost-Benefit Analysis
Cost-benefit analysis says take an action when its marginal benefit is at least its marginal cost, counting implicit opportunity costs and ignoring sunk costs.
Rational decision makers weigh benefits against costs and act when the benefit is at least as large as the cost. The relevant costs include both explicit costs (money actually paid) and implicit costs (the value of alternatives given up, like forgone wages) — together they are the economic cost of a choice.
Decisions happen at the margin: compare the additional (marginal) benefit of one more unit against its additional (marginal) cost, not totals or averages. Keep going while marginal benefit exceeds marginal cost, and stop where they are equal.
Sunk costs — money already spent and unrecoverable — are irrelevant to any forward-looking decision. If you paid $15 for a movie ticket and the movie is terrible, the $15 is gone whether you stay or leave; only the remaining benefits and costs matter.
Key terms for 1.5
Letting sunk costs drive the decision ('I already paid, so I have to keep going'). Sunk costs are unrecoverable and must be ignored — compare only marginal benefits and marginal costs going forward.
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