University of Toronto

Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

Solved Problems: Economists Way of Thinking

Version With 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?
Suggested Solution: $35.
If Jessa does not order the shrimp, she will order the beef, pay $20, and receive $35 in
value. By purchasing and eating the shrimp, she still pays $20, but gives up the $35 in
enjoyment value.
Alternative explanation: The direct cost of ordering the shrimp is the $20 that
leaves her pocket. The indirect or implicit cost is she misses out on the $15 net benefit
of ordering the beef ($35-$20=$15). Opportunity cost is the sum of direct and implicit
costs: $20+$15=$35.
(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?
Suggested Solution: $35. Beef is still better than chicken, so if she orders the shrimp,
she is still giving up the beef.
(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?
Suggested Solution: $33. In this case, if she does not order the shrimp, she would
order the chicken. She thus gives up the $33 in chicken enjoyment value by ordering the
shrimp.
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?
Suggested Solution: Five evenings.
For questions asking how many we want to use the following behavioural rule: keep doing
the activity as long as the marginal benefit is at least as large as the marginal cost.

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Economists Way of Thinking: Problems: Solutions

University of Toronto
Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

As each evening spent studying has an opportunity cost of $40, this means the marginal
cost is $40.
Number of
Evenings

Total
Benefit

Marginal
Benefit

1
2
3
4
5
6
7

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

$130
$110
$90
$70
$50
$30
$10

Table 2: Marginal benefits and costs of studying.

For marginal benefit, we want the extra benefit that accrues from each additional unit. For
any quantity Q, the marginal benefit of Q is the total benefit when the quantity is Q minus
the total benefit when the quantity is one unit less (i.e., Q-1). Table 2 presents this calculation
for evenings one through seven.
For each of the first five evenings, the marginal benefit is greater than the $40 marginal
opportunity cost, thus Shoshanna will definitely study at least five evenings. For the sixth
evening, the marginal benefit is less than the marginal cost ($30 < $40) so she does not study
that sixth evening.
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?
Suggested Solution: M B(Q) = 150 20Q.
First, a little hint. I can pretty much guarantee you that every equation for marginal
cost will be M C(Q) = d + cQ, with both c and d non-negative (i.e., either positive
or equal to zero). Likewise, I can pretty much guarantee you that every equation for
marginal benefit will be M B(Q) = a bQ, with a positive and d non-negative and most
likely positive.
We are looking for an equation M B(Q) = a bQ. From Table 2, we see that marginal
benefit decreases by $20 with each additional unit. This means b = 20. As M B(1) = 130
and marginal benefit decreases by $20 with each additional unit, the intercept (i.e.,
marginal benefit when quantity equals 0) is 130+20=150. We thus have M B(Q) =
150 20Q.
(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?
Suggested Solution: $65.
Rationally implies that Shoshanna following the behavioural rule keep doing the activity as long as the marginal benefit is at least as large as the marginal cost. Because we
assume that evenings spent studying is a continuous variable, she studies until marginal
benefit is exactly equal to marginal cost. As the marginal benefit at 4.25 evenings is
M B(4.25) = 150204.25 = 65, this must have been the marginal cost at 4.25 evenings.
20160913: Page 2

Economists Way of Thinking: Problems: Solutions

University of Toronto
Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

N.B. Note that we are not saying that the marginal cost of studying is always $65 per
evening. Rather we are saying that when she stops studying, the marginal cost is $65
per evening.
(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?
Suggested Solution: 6 14 evenings.
Because we assume that evenings spent studying is a continuous variable, she studies
until marginal benefit is exactly equal to marginal cost.

150 20Q =
|
{z
}

marginal benefit

25
|{z}

marginal cost

125 = 20Q
125
1
Q =
=6
20
4
(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?
Suggested Solution: 5 evenings.
Because we assume that evenings spent studying is a continuous variable, her optimal
quantity of studying (Q ) equates marginal benefit and cost.

150 20Q = 25 + 5Q
|
| {z }
{z
}

marginal benefit

marginal cost

125 = 25Q
125
Q =
=5
25

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.
(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 . . . )
Suggested Solution: You will become a member, and you will purchase 6 units each
period.
First, let us ignore the membership fee. Our behavioural rule is keep doing something
as long as the (marginal) benefit is at least as large as the (marginal) cost. In our
continuous world, you choose the quantity Q such that M B(Q ) = M C(Q ), or

20160913: Page 3

Economists Way of Thinking: Problems: Solutions

University of Toronto
Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

45 5Q
| {z }

marginal benefit

15
|{z}

marginal cost

Q =6

You will want to become a member if the benefits are at least as large as the costs.
Membership costs $20. We need to calculate the benefits of membership. Intuitively,
the benefit of the membership is straight forward: for each unit you acquire because you
are a member, what is the difference between your benefit and cost. We can see this
graphically in Figure 1, where the benefit of joining the club is the shaded area.

Figure 1: Marginal benefits and costs.

The shaded are (the net benefit for the six units you purchase if you join) is a triangle
with base equal to 6 and height equal to $45-$15=$30, for an area of $306
= $90. You
2
thus purchase membership because the benefit ($90) is at least as large as the cost ($20).
(b) Assume the membership fee is $120. Do you purchase a membership? If so, how many
units of coffee do you optimally purchase?
Suggested Solution: You do not purchase membership because the benefit ($90) is
smaller than the cost ($120).
(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?
Suggested Solution: At this point, the $120 is a sunk costregardless of what you
do, you cannot get this back. As above, we set marginal benefit equal to marginal cost
to get Q = 6.
(d) What quantity maximizes total benefit?
Suggested Solution: Q = 9. We have M B(9) = 45 5 9 = 0. For all quantities
smaller than 9, marginal benefit is positive, so consuming those units adds to total
benefit. For all quantities greater than 9, marginal benefit is negative, so consuming
those units decreases total benefit.
N.B. Asking What quantity maximizes total benefit? is the same as asking How
many would you purchase at marginal cost equal to zero?
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Economists Way of Thinking: Problems: Solutions

University of Toronto
Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

(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.
Suggested Solution: Meb, you are wrong. Let us consider unit number 7. Yes, I
benefit from this unit, and my benefit is M B(7) = $45 7 $5 = $10. The problem
is that in order to get a $10 benefit, I have to pay $15. This does not make sense. I
want all units where the benefit is at least as large as the cost, NOT all units where the
benefit is positive.
(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?
Suggested Solution: Because you can recover $100 out of the $120 you paid, only
$20 is sunk (unrecoverable).
Do you sell? Let us consider the costs and benefits. If you sell, you get $100 (the benefit
of selling), but you miss out on the $90 in benefits (the cost of selling). As the benefits
of selling are larger than the costs of selling, you sell the membership to Ms. Jeptoo.
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
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.
1

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

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Economists Way of Thinking: Problems: Solutions

University of Toronto
Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

Given this information, which former Boston Marathon winners will you spend an evening
with?
Suggested Solution: You know that optimality requires doing the activity as long as the
(marginal) benefit is at least as large as the (marginal) cost. In formulating the problem, you
need to choose whether the activity is studying or spending evenings with running legends.
Lets say that the activity is studying.
First, you need to identify the marginal cost of each evening of studying. Start with no
studying, meaning that you spend 1 evening with each of the runners. If you want to study
for one evening, you are going to drop the runner whose company you least value. Sorry,
Lidiya. Thus, the opportunity cost of the first night of studying is that you do not spend an
evening with Lidiya, meaning the cost is $15.
So, now you are down to six runners and one evening of studying Suppose you now want to
spend a second evening studying. This means you need to drop a second runner. Of the six
remaining runners, you least value Salinas company, meaning that you would drop Salina.
Thus, the opportunity cost of the second night of studying is that you do not spend an evening
with Salina, meaning the cost is $24.
Hopefully, you can see where this is going: each time you want to spend another evening
studying, you drop the least desirable of the remaining runners. Hopefully, this makes sense
as well . . .
Now, you need to identify the marginal benefit of each evening of studying. The total benefit
of one evening of studying is $130, meaning the marginal benefit of that first evening of study
is $130-$0=$130. The total benefit of two evening of studying is $240, meaning the marginal
benefit of that second evening of study is $240-$130=$110. Hopefully you can see where this
is going (see Table 2).
Evening

Marginal
Cost

Marginal
Benefit

1
2
3
4
5
6
7

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

$130
$110
$90
$70
$50
$30
$10

Table 4: Marginal benefits and costs of studying.

In Table 4, we put marginal benefits and costs together. You now apply our behavioural rule:
keep doing something as long as the benefits are at least as large as the costs. This is true for
the first 4 evenings of study ($70 > $42 for evening four) but is not true for the fifth evening
of study ($50 < $66). You therefore study for four evenings, and spend one evening with
each of your top three marathon legends: Catherine (Ndereba), Margaret (Okayo) and Rita
(Jeptoo).
N.B. We formulated the problem in terms of the benefits and costs of studying. Alternatively,
you would have gotten the exact same answer if you formulated the problem in terms of
the benefits and costs of evenings with marathon legends. Each evening you spend with a
marathon legend is one fewer evening you spend studying, and thus the cost is the value of
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Economists Way of Thinking: Problems: Solutions

University of Toronto
Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

that evening of study. In this case, marginal benefit would decrease from $99 for the first
evening (where you spend it with Catherine) to $24 for the seventh (where you add Salina).
Marginal cost of spending an evening with a marathon legend increases from $10 for the first
evening with a legend (when you give up that seventh evening of study) to $130 for that
seventh evening with a legend (when you go from one to zero evenings of study and thus give
up that first really valuable evening of study). Marginal benefit of spending and evening with
a marathon legend will be greater than its cost for the first three evenings . . .
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.
Suggested Solution: See figure 2.

Figure 2: Marginal benefit of each life

saved

Figure 3: Marginal cost of each life

saved

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.

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Economists Way of Thinking: Problems: Solutions

University of Toronto
Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

Figure 4: Economist agrees with politician

Figure 5:
politician

Economist disagrees with

(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.
Suggested Solution: See figure 3.
(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.
Suggested Solution: See figure 4.
(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.
Suggested Solution: See figure 5.
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.)
Suggested Solution: If you have a Metropass, the marginal cost of a trip is $0. If you do
not have a Metropass, the marginal cost of each trip is $2.65. With a pass, you take all those
rides where the benefit is positive but less than $2.65. You do not take these rides without a
pass.
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?
Suggested Solution: Whether you buy from A or B, you will have to pay $10 to get home.
If you go to A, you pay $500 + $20 + taxi home. Therefore, only if B is charging more than
$520 do you buy from A.

20160913: Page 8

Economists Way of Thinking: Problems: Solutions

University of Toronto
Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

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.)
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.

(a) What is the marginal benefit (without yet taking into account any payments to the taxi
driver) of taking a taxi for 51 miles (and walking 59 miles?)?
Suggested Solution: Instead of a walking cost of $8.75, your walking costs are $7.35
for a marginal benefit of $1.40.
(b) What is the marginal benefit of taking a taxi for the second 15 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).
Suggested Solution: Instead of a walking cost of $7.35, your walking costs are $6.05
for a marginal benefit of $1.20.
(c) What is the marginal cost of taking a taxi for the second
Suggested Solution: $0.50

1
5

miles?

(d) Assuming rationality as defined by an economist, how long, in miles, is your taxi ride?
Suggested Solution: We need to think in terms of marginal costs and benefits. Start
by taking the taxi all 2 miles. Do you want to walk a fifth of a mile? Walking the first
fifth of a mile only costs you $0.25, which is cheaper than $0.50, so you will walk that
last fifth of a mile. You are now walking a fifth of a mile, what about two-fifths? The
next fifth costs you .65-.25=.4, which is once again cheaper than $0.50. You are now
walking two-fifth of a mile, what about three-fifths? That next fifth of a mile ( 53 ) costs
you $1.20-$0.65=$0.55. That is more expensive than taking a cab. Therefore, you walk
the last 25 of a mile, and take a cab for 1 35 miles.
(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

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Economists Way of Thinking: Problems: Solutions

University of Toronto
Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

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)?
Suggested Solution: For each fifth of a mile that you take the taxi, we need to figure
out the net benefit: marginal benefit minus marginal cost. We do so in Table 6. The
total benefit, before the paying the base rate, is $3.85. So, the maximal base rate at
which you take a taxi is $3.85.
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

Marginal
Costs
0.25
0.40
0.55
0.70
0.85
1.00
1.10
1.20
1.30
1.40
TOTAL

Taxi
Benefit

0.05
0.20
0.35
0.50
0.60
0.70
0.80
0.90
$3.85

Table 6: Net benefit of taking a taxi.

(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?
Suggested Solution: You still take the taxi for 1 35 miles. At the point you notice
the new base rate, the base rate is a sunk cost: you must pay this $4.50 regardless of
how many miles you travel, and thus does not affect the do something as long as the
marginal benefit is at least as large as the marginal cost rule.
(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?
Suggested Solution: You do not take a taxi at all. At this point, the base rate is not
sunk. Without yet taking into account the base rate, your net taxi benefit is $3.85. As
this is less than $4.50, you do not take a taxi.

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Economists Way of Thinking: Problems: Solutions