Question

Juanita is deciding whether to buy a skirt that she wants, as well as where to buy it. Three stores carry the same skirt, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of $112 for the skirt:
Store Travel Time Each Way (Minutes) Price of a Skirt (Dollars per skirt)
Local Department Store 15 103
Across Town 30 89
Neighboring City 60 63

Juanita makes $16 an hour at work. She has to take time off work to purchase her skirt, so each hour away from work costs her $16 in lost income. Assume that returning to work takes Juanita the same amount of time as getting to a store and that it takes her 30 minutes to shop. As you answer the following questions, ignore the cost of gasoline and depreciation of her car when traveling.

Complete the following table by computing the opportunity cost of Juanita's time and the total cost of shopping at each location.

Store Opportunity Cost of Time (Dollars) Price of a Skirt (Dollars per skirt) Total Cost (Dollars)

Local Department Store 103
Across Town 89
Neighboring City 63

Assume that Juanita takes opportunity costs and the price of the skirt into consideration when she shops. Juanita will minimize the cost of the skirt if she buys it from the:_______

Answer 1

Answer:

Juanita should purchase the skirt at the neighboring city because the total economic cost will be lowest.

Explanation:

three options:

• local store 15 minutes away and a price of $103
• across town 30 minutes away and a price of $89
• neighboring city 1 hour away and a price of $63

Juanita makes $16 per hour at her work, and her purchase decision includes the opportunity cost of lost wages:

total economic cost:

• local store = $103 + [1/4 hours x 2 (round trip) x $16] + (1/2 hour x $16) = $119
• across town = $89 + [1/2 hours x 2 (round trip) x $16] + (1/2 hour x $16) = $113
• neighboring city = $63 + [1 hour x 2 (round trip) x $16] + (1/2 hour x $16) = $103

Juanita should purchase the skirt at the neighboring city because the total economic cost will be lowest ($103)

Opportunity costs are the benefits lost or extra costs incurred for choosing one activity or investment over another alternative. Economic costs include both accounting costs and opportunity costs.