University of Toronto

Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

Solved Problems: Economists Way of Thinking

Version Without Solutions
1. Jessa can purchase any entree (beef, chicken or shrimp) for $20. Assuming it is the only
entree she eats, she values the beef at $35. Assuming it is the only entree she eats, she values
the chicken at $28. (If she has already eaten an entree, she has no value for a second entree.)
(a) What is the cost of purchasing (and eating) the shrimp entree?
(b) Jessa learns that she will actually value the chicken at $33 (and not $28). What is the
cost of purchasing (and eating) the shrimp entree?
(c) In addition to learning that she will value the chicken at $33 (and not $28), she also
learns that she will value the beef at $30 (and not $35). What is the cost of purchasing
(and eating) the shrimp entree?
Number of
Evenings

Total
Benefit

1
2
3
4
5
6
7

$130
$240
$330
$400
$450
$480
$490

Table 1: Total benefit as a function of number of evenings of studying.

2. Assume Shoshannas total benefit of study as a function of evenings spent studying per week
is given by Table 1. If each evening spent studying has an opportunity cost of $40, how many
evenings does she spend studying?
3. Assume Shoshannas total benefit of study as a function of evenings spent studying per week
is given by Table 1.
(a) Assume that quantities need not be integers. What is the mathematical equation (formula) for marginal benefit as a function of quantity?
(b) Assume that quantities need not be integers (i.e., evenings spent studying is a continuous
variable). Assume that Shoshanna rationally studied for 4.25 hours. What was the
marginal cost of studying at the last instant of studying for the week?
(c) Assume that quantities need not be integers (i.e., evenings spent studying is a continuous
variable). Assume that Shoshannas (opportunity) cost of studying is $25 per evening.
How many evenings does she spend studying?
(d) Assume that quantities need not be integers (i.e., evenings spent studying is a continuous
variable). Assume that Shoshannas (opportunity) cost of studying is given by M C(Q) =
25 + 5Q. How many evenings does she spend studying?
4. The Coffee Club Assume units (quantities) need not be constrained to integers. Per-period
marginal benefit in dollars, as a function of quantity, is given by M B(Q) = 45 5Q. In order
to purchase any quantity, you must pay a per-period membership fee, and then you pay $15
for each unit you purchase in that period.
20160913: Page 1

Economists Way of Thinking: Problems

University of Toronto
Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

(a) Assume the membership fee is $20. Do you purchase a membership? If so, how many
units of coffee do you optimally purchase? (Hint: First, assume you are a member, and
then figure out how many units you would purchase. The benefit of membership is the
sum of the net benefit from each unit you would purchase. Of course, you only purchase
a membership if the benefit is at least as large as the cost . . . )
(b) Assume the membership fee is $120. Do you purchase a membership? If so, how many
units of coffee do you optimally purchase?
(c) Assume the membership fee is $120. You just clicked the Join Now button on the
website, and thus your credit card was charged $120 and you cannot cancel until next
period. How many units of coffee do you purchase?
(d) What quantity maximizes total benefit?
(e) Mebrahtom found out that you inadvertently paid $120 for the coffee club. He tells
you that you need to maximize the total benefit from coffee and thus purchase 9 units.
Explain to him that he is wrong.
(f) Immediately after inadvertently paying $120 for the coffee club, Ms. Jeptoo offers you
$100 for your membership.
i. How much of your membership fee is sunk?
ii. What is the (opportunity) cost of selling?
iii. Do you (rationally) sell it to her? Explain?
5. For each of the next 7 evenings, you can either study or spend it with a former Boston
Marathon winner. Here are some important details:
Marathon winner

Value

Margaret
Svetlana
Catherine
Salina
Lidiya
Dire
Rita

$67
$42
$99
$24
$15
$28
$66

Table 3: Enjoyment value of spending an evening with each of seven possible former Boston
Marathon winners.
The value you get from spending an evening with each of the former marathon winners
is given in Table 3.
The total value (benefit) of studying as a function of number of evenings spent studying
is given in Table 1.
In any evening you can either study or spend the evening with one of the former
marathon winners.
You can spend at most one evening with any particular former marathon winner.1
1

The assumption is akin to saying the benefit of a second evening with a particular former marathon winner is
sufficiently low.

20160913: Page 2

Economists Way of Thinking: Problems

University of Toronto
Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

There are no other scheduling issues. For example, if you are going to study five of the
next seven evenings, it does not matter which of the seven evenings you spend studying.
Also, each of the former marathon winners is available any of the next 7 days.
Given this information, which former Boston Marathon winners will you spend an evening
with?
6. Politicians are fond of saying things like We should spend whatever it takes to make sure
no citizen dies from a foodborne disease. Let us put on our thinking like an economist
hat, and assume an economist got to choose how much Canada ought to spend in preventing
deaths from contaminated food.2 In all your graphs, label two points on the horizontal axis:
0 and 34.5 million, which happens to be the current population of Canada.
(a) Make the assumption that each life saved is worth the same amount. In a graph with $ on
the vertical axis and number of lives saved on the horizontal axis, draw a representative
marginal benefit curve.
(b) In addition to deciding how much to spend, the economist also get to decide how to
spend any funds allocated to reducing deaths from foodborne illnesses. It makes sense
that the first steps taken are those with the lowest the cost per life saved. As you want
to save more and more lives, you will need to resort to more and more costly steps to do
so. In a different graph with $ on the vertical axis and number of lives saved on the
horizontal axis, draw a representative marginal cost curve.
(c) Perhaps the politician was right. In a new graph, draw a marginal benefit cure and a
marginal cost curve consistent with an economist agreeing with the politician.
(d) Perhaps the politician was wrong (or at least an economist would disagree with her
assessment). In a new graph, draw a marginal benefit cure and a marginal cost curve
consistent with an economist disagreeing with the politician.
7. Who takes more rides on public transportation in a given month: the you who purchased
a Metropass or the you who did not purchase a pass because there were no more available?
(There is no other difference between the two versions of you.)
8. Your computer died. You live between the 2 computer stores. Your cost is $10 each way to
travel from home to either store. A one-way trip from one store to the other is $20. Store A
will definitely sell you the computer for $500. Believing store B will sell you the computer
for $400, you go to store B. Unfortunately the computer is not only not on sale, but it costs
more than at store A. Under what condition do you purchase from store A?
9. You are in Manhattan, and need to get from from 86th Street and Fifth Avenue to 46th Street
and Fifth Avenue. You know that this is 2 miles, as you know that there are 20 Manhattan
streets to a mile. One option is to take a taxi. The cost of a taxi ride is $3.50 plus $0.50
per 15 mile. (This means a one-mile trip costs you $3.50 + 5 $0.50 = $6.00). Assume your
only other option is walking. Walking takes longer (and takes effort). Table 5 presents your
assessment of the cost of walking different distances. (For example, $2.75 is your assessment
of the total cost of walking one mile.)
(a) What is the marginal benefit (without yet taking into account any payments to the taxi
driver) of taking a taxi for 15 miles (and walking 59 miles?)?
2

Remember in the beginning of the semester where I told you that thinking like and economist often results in
saying things that others might find distasteful. This question is one such example.

20160913: Page 3

Economists Way of Thinking: Problems

University of Toronto
Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

Distance
(in miles)
1/5
2/5
3/5
4/5
1
6/5
7/5
8/5
9/5
2

Total
Cost
$0.25
$0.65
$1.20
$1.90
$2.75
$3.75
$4.85
$6.05
$7.35
$8.75

Table 5: Cost in U.S. dollars of walking as a function of distance walked.

(b) What is the marginal benefit of taking a taxi for the second 51 miles? (That is, if you
have so far travelled 15 miles, what is the benefit, before costs, of taking the taxi another
1
5 mile).
(c) What is the marginal cost of taking a taxi for the second

1
5

miles?

(d) Assuming rationality as defined by an economist, how long, in miles, is your taxi ride?
(e) Advanced: In the pricing scheme ($3.50 plus $0.50 per 15 mile), $3.50 is the base rate.
It doesnt take an economist to figure out that if the base rate was instead $100, you
would walk. So, what is the maximal base rate for which it is still optimal to take a taxi
(at least part of the way)?
(f) You are in the taxi and after 25 miles you notice that the base rate is no longer $3.50
but is now $4.50. Assuming rationality as defined by an economist, and assuming this
new information does not change your walking costs as presented in Table 5, how long,
in miles, is your taxi ride?
(g) Assume instead that you noticed the new base rate before getting into the taxi. Assuming
rationality as defined by an economist, and assuming this new information does not
change your walking costs as presented in Table 5, how long, in miles, is your taxi ride?

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Economists Way of Thinking: Problems