James E.

Pesando
Economics 100
Assignment #1
The Economic Way of Thinking (Marginal Analysis and Opportunity Cost)
1. You are planning a trip to Ottawa, which is 400 miles. Except for the cost, you
are completely indifferent etween dri!ing and ta"ing the us. #he us tic"et
costs $1%0. You do not "now how much it would cost to dri!e your car, so you
call &ert' for an estimate. #he person you spea" with tells you that for your
ma"e of car, the costs of a typical 10,000 mile dri!ing year are as follows(
)nsurance $*000
+inancing ,)nterest- 1.00
+uel / Oil 1.00
0aintenance *000
#otal $1000
2 non3economist calculates that these costs sum to $0.104mile and uses this
figure to compute that the 400 mile trip will cost $*%0 y car. #he non3
economist concludes that you should ta"e the us, ecause it is cheaper.
Its better to take a car than to take a bus because insurance and financing
interest are sunk costs so we dont consider them while working with this
question => the cost of running a car would be : 0.35x 00 = !"0
1 ,a- )s the calculation performed y the non3economist correct5 6hould you
decide to ta"e the us or dri!e your car5
0 ,- 6uppose that, when you dri!e, you tend to get one traffic tic"et
,$70- for each *00 miles that you dri!e. )n this e!ent, is it cheaper to
dri!e or ta"e the us5 , In this case its better to take a bus because in
this case dri#ing b$ car would cost !"0% !30%!30 = !&00'
*. You uy a tic"et to a concert in ad!ance for $70. You plan to ta"e pulic
transportation which costs $.. On the day of the concert, there is a power
failure, and the only way you can attend the concert is y ta"ing a taxi, which
costs $40. )t is too late to try to sell your tic"et.
,a- 2 friend calls and offers to share the cost of the taxi ,so you only pay $*0-.
6hould you go to the concert5
(es) cause *re#iousl$ bu$ing ticket and *lanning to take a *ublic
trans*ortation $ou #alued this tri* to a concert !35) while s*ending mone$
on the car is &0) therefor the marginal benefit exceeds marginal cost and
we should take a taxi .
,- )f you must pay for the taxi yourself, should you go to the concert5

In this case $ou still e#aluate $our tri* to concert at last !35 + that means
$ou e#aluate this tri* ha#ing ,- >= !35') the answer is uncertain because
it de*ends on how do $ou e#aluate it) if the ,- more than !0 than $ou
should go ) if $our !35=.,-.!0 ) $ou should lea#e this idea.
7. 2n athlete gi!es up a 8o that pays $..,000 per year to train full3time for the
Olympics. 6he recei!es a grant of $10,000 per year from 6port 9anada, ut
her training expenses are $1.,000 per year.
" ,a- :hat is the annual opportunity cost, expressed in dollars, of this
indi!idual;s decision to train for the Olympics5
& /he annual o**ortunit$ cost is the left *aid 0ob which is !55)000 a $ear
% !"5)000 for ex*enses 1 !"0)000 grant = !20)000 annual o**ortunit$
cost.
1 ,- )f 6port 9anada were to eliminate its grants to athletes, how
would this affect(
*
,i- #he opportunity cost of this athlete to train for the Olympics5
It would be then !55)000 a $ear % !"5)000 = !30)000
,ii- the numer of 9anadians who would choose to train for the
Olympics5
/he number of 4anadians would be reduced) cause the
o**ortunit$ cost of being 5l$m*ic 6thlete would increase => this
action would less likel$ to be taken.
3 ,c- )f food and shelter for this indi!idual cost $10,000 per year, how
would this affect the annual opportunity cost of her training for the
Olympics5
)n this case s*ends on food and shelter are sunk costs) because
regardless of *artici*ating in 5l$m*ics $ou would ha#e to take those
ex*enses and the$ do not rel$ on $our choose of 5l$m*ics.
. John and Jerry each decide to operate a sandwich stand, with uncertain
profitaility. <e!enues turn out to e $7.0 for an %3hour day. =icensing fees
are $.0 and operating costs are $100 per day. John is an uns"illed wor"er
who could earn $1* per hour. Jerry is a computer programmer who could earn
$70 per hour. :ill John continue to operate a sandwich stand5 :ill Jerry5
Explain.
/he benefit that the$ will earn tends to be : !3501 !50 1 !"00 = !&00 *er da$
+ 7hrs working condition'
8ohn can earn 79!"& = !:2 *er this 7 hrs working condition da$.
8err$ can earn 79!30 = !&0 *er this da$
6s a consequence for 8ohn it is *rofitable to o*erate a stand and he would
likel$ to ke* doing it because his o**ortunit$ cost of gi#ing it u* is onl$ !:2 *er
da$) which is less than he earns)
8err$ would sto* o*erating the sandwitch stand because his o**ortunit$ cost
of doing it is !&0 while he can earn onl$ !&00) so whe would rather *refer to
work for this !30 and get !0 more a da$.
5. John and 0ary each uy a new house for $400,000. 0ary pays cash. John
orrows the full $400,000 from the an" and pays interest at the mar"et
interest rate of 4 percent. )s it correct to say that the cost to 0ary of li!ing in
her house is less than the cost to John5 :hy or why not5
;a$ing these !00)000 ,arr$ cannot s*end it on an$where else => its
o**ortunit$ cost could be sim*l$ in#esting these mone$ or gi#ing these mone$
to 8ohn for 3.:< interest rate.
If for exam*le if ,ar$ earns these 3.:< of her funds) then the annual cost of
li#ing in the home would be the same for ,ar$ and 8ohn.
>. 2 group ,group 2- of 1. students sits down at a restaurant for dinner and
agrees to share costs e?ually. 2 different group ,group @- of 1. students
decides that each student will pay his4her own ill. 2s a result, the total ill of
group @ will lAssfgexceed the total ill of group 2. 2nswer whether the
statement is true, false or uncertain and explain your answer.
=o that is not a true. >haring the *rice we are *a$ing less than #alue this *roduct) we
assume that *iece of *i??a which cost 3! and $ou #alue it at !&.5 there are *eo*le
eating ill cost !3@ so the marginal benefit would seem to be more than marginal cost
therefor the *ossibilit$ of ordering a new dish would be high because ,- exceeds
,4. Ahile $ou *a$ for the bill on $our own it will cost $ou !3 but $ou still #alue it as
!&.5 that means that ,4 exceeds ,- and $ou would less likel$ to order a new dish.
6s a result in a grou* 6 students will *a$ more because the$ will order more than in
a grou* -
1. You won a free tic"et to see an Eric 9lapton concert ,which has no resale
!alue-. @o Bylan is performing on the same night and is your next3est
alternati!e acti!ity. #ic"ets to see Bylan cost $10. On any gi!en day, you
would e willing to pay up to $100 to see Bylan. 2ssume there are no other
costs of seeing either performer.
@ased on this information, what is the opportunity cost of seeing 9lapton5
/he o**ortunit$ cost of seeing 4la*ton is the next best alternati#e seeing B$lan
which he #alues as !"00 therefor the o**ortunit$ cost of seeing that *erformer is
!"00 1 !30 + the *rice of the concert ' = $our marginal benefit of seeing B$lan. /he
o**ortunit$ cost = the marginal benefit of making the next best alternati#e % the cost
of doing this action => 0% !30= !30