Marginal Analysis and Opportunity Cost
James E. Pesando Economics 100 Assignment #1 The Economic Way of Thinking (Marginal Analysis and Opportunity Cost) OC= Value of your next best option 1.
You are planning a trip to Ottawa, which is 400 miles. Except for the cost, you are completely indifferent between driving and taking the bus. The bus ticket costs $180. You do not know how much it would cost to drive your car, so you call Hertz for an estimate. The person you speak with tells you that for your make of car, the costs of a typical 10,000 mile driving year are as follows: Insurance Financing (Interest) Fuel & Oil Maintenance Total
$2000 1500 1500 2000 $7000
A non-economist calculates that these costs sum to $0.70/mile and uses this figure to compute that the 400 mile trip will cost $280 by car. The non-economist concludes that you should take the bus, because it is cheaper. 1
(a)
Is the calculation performed by the non-economist correct? Should you decide to take the bus or drive your car? The calculation performed is not correct, as depending on Fixed costs are… -Insurance 2000, -Financing 1500, These costs are therefore irrelevant to the cost of driving your car to Ottawa as they would have to pay in any route of action and therefore cancel out. 35,000/10,000= 0.35/mile, 1.35x400= 140 Take car because 140180
0 1
(b)
Suppose that, when you drive, you tend to get one traffic ticket ($30) for each 200 miles that you drive. In this event, is it cheaper to drive or take the bus?
2.
You buy a ticket to a concert in advance for $30. You plan to take public transportation which costs $5. On the day of the concert, there is a power failure, and the only way you can attend the concert is by taking a taxi, which costs $40. It is too late to try to sell your ticket. (a) A friend calls and offers to share the cost of the taxi (so you only pay $20). Should you go to the concert? MB at least $35 MC=$20, go to concert because MB>MC
Since you already paid for the ticket, and cannot sell it, it would be a waste of money not to go, and you would be spending $ 20 dollars for transportation equaling a sum of $50. You are also going with a friend (and not paying for the whole $40 cab fare), which makes it more fun, and will not regret not going. (b) If you must pay for the taxi yourself, should you go to the concert? Maybe, go if if MB>MC 3.
An athlete gives up a job that pays $55,000 per year to train full-time for the Olympics. She receives a grant of $10,000 per year from Sport Canada, but her training expenses are $15,000 per year.
1
(a)
What is the annual opportunity cost, expressed in dollars, of this individual’s decision to train for the Olympics? Her annual opportunity cost would be the loss of her salary from her job, and the difference between the grant and her training expenses. ($5,000+ $55,000) =60,000 1 (b) If Sport Canada were to eliminate its grants to athletes, how would this affect: 2 (i) the opportunity cost of this athlete to train for the Olympics? It would be the loss of salary of $55,000/ year and the extra cost of the training expenses of $15,000/ year. Therefore a total of $70,000. (ii) the number of Canadians who would choose to train for the Olympics? Many athletes would incur a debt that would create a poorer living standard for themselves, while they could be making money. Also the chances of winning a medal are slim. 2 3 4.
(c)
If food and shelter for this individual cost $10,000 per year, how would this affect the annual opportunity cost of her training for the Olympics? .Sunk costs: food and shelter costs don't affect opportunity costs because they're sunk costs/you have to have food and shelter if you train or work
John and Jerry each decide to operate a sandwich stand, with uncertain profitability. Revenues turn out to be $350 for an 8-hour day. Licensing fees are $50 and operating costs are $100 per day. John is an unskilled worker who could earn $12 per hour. Jerry is a computer programmer who could earn $30 per hour. Will John continue to operate a sandwich stand? Will Jerry? Explain.
Profits= Revenues minus cost = 200 John’s OC= 12x8= 96 Yes, 200>96 Jerry’s OC= 30x8= 240. No 200
You are planning a trip to Ottawa, which is 400 miles. Except for the cost, you are completely indifferent between driving and taking the bus. The bus ticket costs $180. You do not know how much it would cost to drive your car, so you call Hertz for an estimate. The person you speak with tells you that for your make of car, the costs of a typical 10,000 mile driving year are as follows: Insurance Financing (Interest) Fuel & Oil Maintenance Total
$2000 1500 1500 2000 $7000
A non-economist calculates that these costs sum to $0.70/mile and uses this figure to compute that the 400 mile trip will cost $280 by car. The non-economist concludes that you should take the bus, because it is cheaper. 1
(a)
Is the calculation performed by the non-economist correct? Should you decide to take the bus or drive your car? The calculation performed is not correct, as depending on Fixed costs are… -Insurance 2000, -Financing 1500, These costs are therefore irrelevant to the cost of driving your car to Ottawa as they would have to pay in any route of action and therefore cancel out. 35,000/10,000= 0.35/mile, 1.35x400= 140 Take car because 140180
0 1
(b)
Suppose that, when you drive, you tend to get one traffic ticket ($30) for each 200 miles that you drive. In this event, is it cheaper to drive or take the bus?
2.
You buy a ticket to a concert in advance for $30. You plan to take public transportation which costs $5. On the day of the concert, there is a power failure, and the only way you can attend the concert is by taking a taxi, which costs $40. It is too late to try to sell your ticket. (a) A friend calls and offers to share the cost of the taxi (so you only pay $20). Should you go to the concert? MB at least $35 MC=$20, go to concert because MB>MC
Since you already paid for the ticket, and cannot sell it, it would be a waste of money not to go, and you would be spending $ 20 dollars for transportation equaling a sum of $50. You are also going with a friend (and not paying for the whole $40 cab fare), which makes it more fun, and will not regret not going. (b) If you must pay for the taxi yourself, should you go to the concert? Maybe, go if if MB>MC 3.
An athlete gives up a job that pays $55,000 per year to train full-time for the Olympics. She receives a grant of $10,000 per year from Sport Canada, but her training expenses are $15,000 per year.
1
(a)
What is the annual opportunity cost, expressed in dollars, of this individual’s decision to train for the Olympics? Her annual opportunity cost would be the loss of her salary from her job, and the difference between the grant and her training expenses. ($5,000+ $55,000) =60,000 1 (b) If Sport Canada were to eliminate its grants to athletes, how would this affect: 2 (i) the opportunity cost of this athlete to train for the Olympics? It would be the loss of salary of $55,000/ year and the extra cost of the training expenses of $15,000/ year. Therefore a total of $70,000. (ii) the number of Canadians who would choose to train for the Olympics? Many athletes would incur a debt that would create a poorer living standard for themselves, while they could be making money. Also the chances of winning a medal are slim. 2 3 4.
(c)
If food and shelter for this individual cost $10,000 per year, how would this affect the annual opportunity cost of her training for the Olympics? .Sunk costs: food and shelter costs don't affect opportunity costs because they're sunk costs/you have to have food and shelter if you train or work
John and Jerry each decide to operate a sandwich stand, with uncertain profitability. Revenues turn out to be $350 for an 8-hour day. Licensing fees are $50 and operating costs are $100 per day. John is an unskilled worker who could earn $12 per hour. Jerry is a computer programmer who could earn $30 per hour. Will John continue to operate a sandwich stand? Will Jerry? Explain.
Profits= Revenues minus cost = 200 John’s OC= 12x8= 96 Yes, 200>96 Jerry’s OC= 30x8= 240. No 200
