Expected Utility

Decision Rule: Maximizing Net Benefit

A freelance graphic designer is offered a one-day project that pays $500. The software license required for this specific project costs $50. To complete the project, the designer must turn down a different, guaranteed one-day job that would have paid $300. What is the net benefit for the designer if they choose to take the new project?

Analyzing a Job Offer

Calculating Net Benefit for a Business Decision

A student values attending a free concert at $80. To attend, they must pay $10 for transportation and give up a 4-hour work shift that pays $15 per hour. The student's net benefit from attending the concert is $70.

A university student is considering a 10-week summer internship in another city. The internship offers a total stipend of $6,000. To accept, the student must pay $1,500 for a short-term apartment lease. They would also have to turn down their usual summer job at a local cafe, where they would have earned $4,000 over the same period. The student subjectively values the professional experience from the internship at $2,000.

Based on the scenario, match each value to its correct economic category.

Analyzing a Career Decision

A company projects that launching a new product will generate $250,000 in revenue. The direct costs for production and marketing are $180,000. To pursue this launch, the company must forgo an alternative project that would have yielded a profit of $40,000. The total net benefit of launching the new product is $____.

A person is evaluating whether to take a specific action. To determine the net benefit, or pay-off, of this action, they must follow a logical process. Arrange the following steps in the correct order.

A student is deciding between two summer options. Option A is an unpaid internship in their field of study, which they value at $3,000 for the experience. Option B is a summer job paying $4,000. The student calculates the net benefit of choosing the internship as $3,000, reasoning that since the internship itself costs nothing, there are no costs to subtract from the benefit. Why is this calculation of the net benefit incorrect?

A student is deciding how to spend their Saturday. They have three mutually exclusive options:

1. Work an extra shift at their job, which would earn them $120.
2. Attend a music festival, which costs $50 for a ticket but which they value at $180.
3. Go on a day trip with friends, which costs $40 in gas and food, and which they value at $150.

Assuming the student wants to choose the option with the greatest net benefit (or 'pay-off'), which action should they take?

Formula for Net Benefit

Definition of Opportunity Cost

Economic Rent