Question

Juanita makes $30 an hour at work. She has to take time off work to purchase her dress, so each hour away from work costs her $30 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.

Assume that it takes 15 minutes to travel to the local department store, 30 minutes to travel to the store across town, and 60 minutes to travel to the store in the neighboring city. 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 Suit (Dollars per suit) Total Cost (Dollars)
Local Department Store ___________________ 114 _________
Across Town ___________________ 86 _________
Neighboring City ____________________ 60 _________

Assume that Juanita takes opportunity costs and the price of the suit into consideration when she shops. Juanita will minimize the cost of the suit of she buys it from the _____

Answer 1

Juanita should purchase the suit at the store across town because the total economic cost will be lowest.

Explanation:

three options:

1. local store 15 minutes away and a price of $114
2. across town 30 minutes away and a price of $86
3. neighboring city 1 hour away and a price of $60

Juanita makes $30 per hour at her work, and her purchase decision includes the opportunity cost of lost wages:

total economic cost:

• local store = $114 + [1/4 hours x 2 (round trip) x $30] + (1/2 hours x $30 spent shopping) = $144
• across town = $86 + [1/2 hours x 2 (round trip) x $30] + (1/2 hours x $30 spent shopping) = $131
• neighboring city = $60 + [1 hour x 2 (round trip) x $30] + (1/2 hours x $30 spent shopping) = $135

Juanita should purchase the skirt at the store across town because the total economic cost will be lowest ($131)

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.