Question

A consumer has two basic choices in making a trip: rent a car for $30.00 a day and spend two days of travel to the destination, or spend $400 for an airplane ticket and fly to the destination in two hours. The marginal utilities of the car rental and the airline ticket are the same. The consumer values time at $5 an hour. The rational consumer will most likely

Answer 1

Answer:

The answer is to rent a car.

Explanation:

Value per hour = $5

24 hours make a day

Value for a day(24 hours) = $120

Value for two days(48 hours) = $240

For renting a car:

Car is $30/ day

So car will be $60($30 x 2) for 2 days.

Value for two days(48 hours) that he spent = $240

Therefore, total cost for the two days if he rents a car is

$60 + $240 = $300

For flight:

$400 for airplane ticket.

Two hours that he will spend is $10($5 x 2)

Therefore, total cost for taking flight is

$400 + $10

=$410

So a rational consumer will go for the lower cost which is to rent a car.