Question

You are thinking about traveling to visit friends in Atlanta. You can fly or take the bus. A round-trip plane ticket costs $300, and it takes 3 hours one way to get from your house to your friend’s house if you fly. A round-trip bus ticket costs $150, and it takes 10 hours one way using the bus.

What is the value of your time necessary to induce you to buy the plane ticket instead of taking the bus?
A. greater than $10.71/hour
B. greater than $15.00/hour
C. greater than $21.43/hour
D. greater than $100.00/hour

Answer 1

The hourly value of time at which one would be economically indifferent between flying and taking the bus is $11.54. Given that this value is greater than $10.71, the correct answer to the question is option A: greater than $10.71/hour.

Step-by-step explanation:

To determine the value of time that makes it worthwhile to choose flying over taking the bus, we calculate the difference in costs and then the difference in time saved. Then, we divide the cost difference by the time saved to find the value of time per hour that makes flying a better option than taking the bus.

Flying costs $300 and takes 3 hours each way, plus an extra 30 minutes in the airport per trip, adding up to 7 hours round trip. Taking the bus costs $150 and takes 10 hours each way, adding up to 20 hours round trip. The cost difference is $300 - $150 = $150. The time saved is 20 hours - 7 hours = 13 hours.

Dividing the extra cost by the time saved gives us the value of time: $150 / 13 hours = $11.54 per hour. This is the hourly value of time at which a person would be indifferent between flying and taking the bus. Therefore, if your time is worth more than $11.54 per hour, flying becomes the better option economically.

Considering the options given, the closest and correct answer is greater than $10.71/hour (option A), as $11.54 is greater than $10.71. If your time's value is less than $11.54 per hour, you would opt for the bus, and if it is more, you would choose to fly.

Answer 2

The correct answer is D. greater than $100.00/hour.

If we calculate it, the plane ticket that costs $300 for 3 hours is equivalent to $100 per hour. On the other hand, the bus ride will cost $150 per 10 hours which is equivalent to $15 per hour. Since your time values more than the $100 per hour, you will buy the plane ticket instead of taking the bus.