Learn Before
Net Benefit (Pay-off)
Formula for Net Benefit
The net benefit, or pay-off, of an action is calculated by subtracting its total costs from its total benefits. The general formula is:
For example, to find the net benefit of attending a concert, you subtract the ticket price from the value of your enjoyment. If the enjoyment is valued at $55 and the ticket costs $25, the calculation is:
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CORE Econ
Economics
Social Science
Empirical Science
Science
Economy
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.2 Technology and incentives - The Economy 2.0 Microeconomics @ CORE Econ
Related
Expected Utility
Decision Rule: Maximizing Net Benefit
Economic Rent Definition
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:
- Work an extra shift at their job, which would earn them $120.
- Attend a music festival, which costs $50 for a ticket but which they value at $180.
- 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
Learn After
A company is considering two marketing campaigns. Campaign A has total expected benefits valued at $50,000 and total costs of $15,000. Campaign B has total expected benefits valued at $65,000 and total costs of $32,000. To achieve the highest possible pay-off, which campaign should the company choose?
Evaluating a Business Decision
Calculating Net Benefit of a Project
An individual decides to purchase a new video game. They calculate that the net benefit, or pay-off, from this decision is $20. If the total benefit they receive from the enjoyment and entertainment of the game is valued at $80, what was the total cost of the video game?
A student is considering a weekend trip. They value the enjoyment and relaxation from the trip at $300. The direct costs for the trip are a $150 hotel room and $50 for gas. To go on the trip, they must also miss a weekend work shift where they would have earned $120.
Statement: The pay-off from taking the weekend trip is positive.
Investment Decision for a Cafe
Evaluating a Personal Finance Decision
Evaluating a Job Offer Decision
A rational decision-maker analyzes the pay-off of an action before proceeding. For each of the following independent scenarios, calculate the net benefit by subtracting total costs from total benefits, and match the scenario to its correct net benefit value.
A farmer is considering planting a new crop. The total expected benefits from the harvest are valued at $8,500. The total costs for seeds, fertilizer, and labor amount to $3,200. The net benefit, or pay-off, from planting this new crop is $____.