ECO 101H1: Principles of Microeconomics Prof. Freitas, University of Toronto
Problem Set 1: Thinking like an Economist
Questions and Solutions
1) You’re at your local lunch restaurant. All lunch specials cost $15 and you have a gift card for $15 for this
restaurant that expires today. You eat only 1 dish for lunch. The menu, with your benefit for each option,
expressed in dollars, is given in the table below.
Lunch Special Your benefit
Vegetarian $18
Beef $25
Chicken $20
Fish $14
1a) What is the (opportunity) cost of choosing (buying and eating) the beef special?
Solution: We follow the same process as we always do.
• Step 1: Identify the resources being used for the action/choice.
• Step 2: Identify the alternatives.
• Step 3: Identify the net benefit from the next best use.
• Step 4: Calculate the OC of A as $Value of Resources for A + Net benefit from option B
– If Option A uses extra resources (or different resources) than Option B, make sure to value those
resources at their next best use.
The resource used to buy the beef special is the gift card.
Alternatives?
• You can only use it in the restaurant so the other choices in the table are your only options.
• You only buy 1 dish, so every option except the beef is an alternative.
• The gift card expires today, so saving it for another day is not an option.
OK, so the alternatives are Vegetarian, Chicken and Fish. Each of them gives us some benefit (say B). But
what resource do they use? The same gift card, with the same restrictions. That makes the net benefit from
each option B minus the gift card. All of them use the same gift card and cost exactly the same, so to pick
the best alternative we are looking for the one with the highest B, which is Chicken at $20.
The OC of beef is therefore Gift card + $20 - Gift card = $20. The OC of beef is giving up the option
to eat chicken, which you would value at $20.
1b) What is the opportunity cost of choosing the vegetarian option?
Solution: Follow the same steps as above until you get to the alternatives. To pick the best alternative, we are
looking for the one with the highest benefit, which is Beef at $25.
The OC of the vegetarian option is therefore Gift card + $25 - Gift card = $25. The OC of the vegetarian
option is giving up the option to eat beef, which you would value at $25.
1c) What do you choose to eat?
Solution: The (opp.) cost of each option is given in the table below, using the original benefits from the question
Lunch Special Your benefit OC
Vegetarian $18 $25
Beef $25 $20
Chicken $20 $25
Fish $14 $25
202609 1 of 13 Problem Set 1 Questions and Solutions
, ECO 101H1: Principles of Microeconomics Prof. Freitas, University of Toronto
Beef is the only option for which the benefit is higher than the (opp.) cost, so you choose Beef.
1d) You read an article on health that says fish and vegetables are healthier options. It changes your benefit from
the vegetarian option to $19 and from the fish to $23. What is the cost of choosing the beef option now?
Solution: Chicken is no longer the next best option; that is now fish at $23. Following the same process as above,
the OC of beef is $23.
2) You are choosing how many hours to spend studying this weekend. Your total benefit for a given number of
hours spent studying is given in the table below. If you don’t study, you work as a babysitter for $20 an hour.
No. of hours Total Benefit
1 $67
2 $126
3 $177
4 $220
5 $255
6 $282
7 $301
8 $312
9 $315
2a) How many hours do you study this weekend?
Solution: 6 hours – the sixth is the last hour whose marginal benefit still covers the $20 you give up
in babysitting wages.
Whenever you see a “how many?” question, your first instinct should be to calculate the marginal cost and
marginal benefit of an extra unit. Here your units are hours.
For marginal benefit, we want the extra benefit from each additional unit. For any quantity Q, the marginal
benefit of the Qth hour is the total benefit when you have Q hours, minus the total benefit from when you
have Q − 1 hours. The table below does this calculation for you.
No. of hours Total Benefit Marginal Benefit Marginal cost Total Cost
1 $67 $67 $20 $20
2 $126 $59 $20 $40
3 $177 $51 $20 $60
4 $220 $43 $20 $80
5 $255 $35 $20 $100
6 $282 $27 $20 $120
7 $301 $19 $20 $140
8 $312 $11 $20 $160
9 $315 $3 $20 $180
The marginal cost of an hour spent studying is the money you could have earned if you spent that hour in
your next best alternative, i.e. babysitting, which is $20.
202609 2 of 13 Problem Set 1 Questions and Solutions
Problem Set 1: Thinking like an Economist
Questions and Solutions
1) You’re at your local lunch restaurant. All lunch specials cost $15 and you have a gift card for $15 for this
restaurant that expires today. You eat only 1 dish for lunch. The menu, with your benefit for each option,
expressed in dollars, is given in the table below.
Lunch Special Your benefit
Vegetarian $18
Beef $25
Chicken $20
Fish $14
1a) What is the (opportunity) cost of choosing (buying and eating) the beef special?
Solution: We follow the same process as we always do.
• Step 1: Identify the resources being used for the action/choice.
• Step 2: Identify the alternatives.
• Step 3: Identify the net benefit from the next best use.
• Step 4: Calculate the OC of A as $Value of Resources for A + Net benefit from option B
– If Option A uses extra resources (or different resources) than Option B, make sure to value those
resources at their next best use.
The resource used to buy the beef special is the gift card.
Alternatives?
• You can only use it in the restaurant so the other choices in the table are your only options.
• You only buy 1 dish, so every option except the beef is an alternative.
• The gift card expires today, so saving it for another day is not an option.
OK, so the alternatives are Vegetarian, Chicken and Fish. Each of them gives us some benefit (say B). But
what resource do they use? The same gift card, with the same restrictions. That makes the net benefit from
each option B minus the gift card. All of them use the same gift card and cost exactly the same, so to pick
the best alternative we are looking for the one with the highest B, which is Chicken at $20.
The OC of beef is therefore Gift card + $20 - Gift card = $20. The OC of beef is giving up the option
to eat chicken, which you would value at $20.
1b) What is the opportunity cost of choosing the vegetarian option?
Solution: Follow the same steps as above until you get to the alternatives. To pick the best alternative, we are
looking for the one with the highest benefit, which is Beef at $25.
The OC of the vegetarian option is therefore Gift card + $25 - Gift card = $25. The OC of the vegetarian
option is giving up the option to eat beef, which you would value at $25.
1c) What do you choose to eat?
Solution: The (opp.) cost of each option is given in the table below, using the original benefits from the question
Lunch Special Your benefit OC
Vegetarian $18 $25
Beef $25 $20
Chicken $20 $25
Fish $14 $25
202609 1 of 13 Problem Set 1 Questions and Solutions
, ECO 101H1: Principles of Microeconomics Prof. Freitas, University of Toronto
Beef is the only option for which the benefit is higher than the (opp.) cost, so you choose Beef.
1d) You read an article on health that says fish and vegetables are healthier options. It changes your benefit from
the vegetarian option to $19 and from the fish to $23. What is the cost of choosing the beef option now?
Solution: Chicken is no longer the next best option; that is now fish at $23. Following the same process as above,
the OC of beef is $23.
2) You are choosing how many hours to spend studying this weekend. Your total benefit for a given number of
hours spent studying is given in the table below. If you don’t study, you work as a babysitter for $20 an hour.
No. of hours Total Benefit
1 $67
2 $126
3 $177
4 $220
5 $255
6 $282
7 $301
8 $312
9 $315
2a) How many hours do you study this weekend?
Solution: 6 hours – the sixth is the last hour whose marginal benefit still covers the $20 you give up
in babysitting wages.
Whenever you see a “how many?” question, your first instinct should be to calculate the marginal cost and
marginal benefit of an extra unit. Here your units are hours.
For marginal benefit, we want the extra benefit from each additional unit. For any quantity Q, the marginal
benefit of the Qth hour is the total benefit when you have Q hours, minus the total benefit from when you
have Q − 1 hours. The table below does this calculation for you.
No. of hours Total Benefit Marginal Benefit Marginal cost Total Cost
1 $67 $67 $20 $20
2 $126 $59 $20 $40
3 $177 $51 $20 $60
4 $220 $43 $20 $80
5 $255 $35 $20 $100
6 $282 $27 $20 $120
7 $301 $19 $20 $140
8 $312 $11 $20 $160
9 $315 $3 $20 $180
The marginal cost of an hour spent studying is the money you could have earned if you spent that hour in
your next best alternative, i.e. babysitting, which is $20.
202609 2 of 13 Problem Set 1 Questions and Solutions
