Marginal Analysis, Opportunity Cost, and the Gains from Trade

Marginal Analysis, Opportunity Cost, and the Gains from Trade

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 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 $2000 Financing (Interest) 1500 Fuel & Oil 1500 Maintenance 2000 Total $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.
(a) Is the calculation performed by the non-economist correct? Should you
decide to take the bus or drive your car?

(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?

(b) If you must pay for the taxi yourself, should you go to the concert?

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.
(a) What is the annual opportunity cost, expressed in dollars, of this individual’s decision to train for the Olympics?
(b) If Sport Canada were to eliminate its grants to athletes, how would this affect:...

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