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 Price of a Skirt (Minutes) (Dollars per skirt) Local Department Store 15 112 Across Town 30 89 Neighboring City 60 70 Juanita makes $26 an hour at work. She has to take time off work to purchase her skirt, so each hour away from work costs her $26 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.

Answer 1

Answer:

It will puchase the skirt across town as it has the less economic cost.

Explanation:

We are going to add up the opportunity cost (lost wages) to the cost of the skirt:

                 travel-time* Price   **Opp. Cost    Economic Cost

local department    30     $ 112.00   $ 13.00           $ 125.00

across town          60     $ 89.00   $ 26.00   $ 115.00

neighboring city 120     $ 70.00   $ 52.00   $ 122.00

*travel-time we multiple the time it took each eway by 2

**Opp. Cost  = wages per hour x travel time / 60

Then, the economic cost is the sum of the value of the skirt and the lost wages.

We pick the lowest economic cost.

Answer 2

The economic cost is the type of cost that includes the opportunity cost for any business decision at the time of analyzing the economic decisions. The economic cost is the combination of losses of goods taking into consideration all the factors of profitability.

In the given case, Juanita should buy skirts from across town as it has a less economic cost of $115.

The economic cost is determined by combining the following costs:

1. Price (in Dollar) per skirt
2. Opportunity cost

Refer to the table attached below for determining the economic cost.

Working Note:

1. The formula to compute the opportunity cost is:

$\text{Opportunity Cost}&=\dfrac{\text{Wages per hour}\times \text{Travel time}}{60\;\text{minutes}}$

2. The price of each skirt is given.

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