Marginal Analysis, Opportunity Cost, And The Gains From Trade

1258 words - 6 pages

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 ...view middle of the document...

John and Jerry each decide to operate a sandwich stand, with uncertain profitability. Revenues turn out to be $350 for an 8-hour day. Licensing fees are $50 per day and operating costs are $100 per day. John is an unskilled worker who could earn $12 per hour. Jerry is a computer programmer who could earn $30 per hour. Will John continue to operate a sandwich stand? Will Jerry? Explain.

5. John and Mary each buy a new house for $400,000. Mary pays cash. John borrows the full $400,000 from the bank and pays interest at the market interest rate of 4 percent. Is it correct to say that the cost to Mary of living in her house is less than the cost to John? Why or why not?

6. A group (group A) of 15 students sits down at a restaurant for dinner and agrees to share costs equally. A different group (group B) of 15 students decides that each student will pay his/her own bill. As a result, the total bill of group B will exceed the total bill of group A. Answer whether the statement is true, false or uncertain and explain your answer.

7. You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $70. On any given day, you would be willing to pay up to $100 to see Dylan. Assume there are no other costs of seeing either performer.

Based on this information, what is the opportunity cost of seeing Clapton?

The Gains from Trade

1. Canada and Russia both produce wheat and meat. One Canadian worker can produce 20 bushels of wheat per hour or 5 pounds of meat per hour. A Russian worker can produce 16 bushels of wheat per hour or 8 pounds of meat per hour.

a) Draw the production possibilities frontiers for Canada and Russia.

b) What is the opportunity cost of producing wheat and meat in each of
these two countries?

c) If Canada and Russia decide to trade, which commodity will Russia
trade to Canada? Explain.

d) There are 1000 workers in Canada and in Russia. Before trade,
workers devote one half of their time to the production of wheat and meat. After trade, workers specialize in the production of...

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