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University of Toronto St. George
Jack Carr

th 15 September 2010 Economics 100 The economic way of thinking Q1. You decide to attend a concert. It costs 200$. You value the concert at 400$. Your next best alternative is to go to a restaurant, which you value at 150$ and which costs 100$. What is the opportunity cost? Answer: 200 + (150 100) = 250 How does the opportunity cost change if the satisfaction you get from going to the concert increases from 400 to 500? Answer: not at all since the opportunity cost does not depend on the value to you of the action taken. Rational decision making Undertake activity if the marginal (additional) benefit exceeds marginal (additional) cost. Insights: 1. Includes all opportunity costs. 2. Ignore sunk costs. Sunk costs fixed costs costs which are incurred whether or not the action is taken Insight only relevant costs are those which can be avoided if action is not taken. Restaurant : should it stay open? Lease payment: $12000 per month - $400 per day Dinner: 150 meals Lunch: 25 meals www.notesolution.comAdditional Marginal revenue: 25 meals at 20$ = 5000$ Additional Marginal costs Chef: hours at 30$ - 90$ Waiters (2): 6 hours at 10$ = 90$ Food: 25 meals at 5$ = 125$ Total: 275$ Conclusion: 1. $500 - $275 = $225 profitable to stay open 2. Fixed (sunk) cost is not relevant. Marginal benefit of attending sports event: 100$ (both Jack and Jill) Ticket Price: 50$ 1. Jack buys one week in advance 2. Jill plans to buy on the day of the event Subway breaks down on the day of the event, jack and jill both face unexpected cost: 75$ for taxis Should jack attend the event? Should Jill attend the event? Answer: Jack should attend
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