James E. Pesando
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:
Financing (Interest) 1500
Fuel & Oil 1500
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 140<180
Therefore, the non-economist was wrong and you should drive to Ottawa.
(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
2 Tickets= $60, so 14-+60= 200 Take bus 200>180
0 (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?
1 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:
(i) the opportuni