Question

A world-famous company, Orange Inc., produces a very popular smart cellphone (in two colors, black and pink) and sells this product via three designated stores in Zhuhai:

Store A sells the black cellphone at the price RMB2000 with some special after-sale service.
Store B sells the pink cellphone at the price RMB2400.
Store C sells the black cellphone at the price RMB1800.
Suppose you value the black cellphone without after-sale service at RMB1700; value the pink cellphone at RMB2500; and value the after-sale service at RMB500.

a. Are you going to buy a smart cellphone produced by Orange Inc. from any of these three stores? Please explain your answer briefly. (Hint: Calculate the net benefits from purchasing a smart cellphone from each store.)

b. If you plan to buy a smart cellphone produced by Orange Inc., which store in Zhuhai are you going to purchase it from? Please explain your answer briefly.

c. ) What is the opportunity cost of your choice in part b? What is the marginal cost of your choice? What is the marginal benefit? (Hint: Consider the marginal effect of doing it and not doing it.)

Answer 1

Based on the calculation of net benefits, the best option is to purchase from Store A since it offers the highest net benefit at ¥200. The opportunity cost of buying from Store A is the next best alternative forgone, and the marginal benefit is the additional gain of purchasing the phone with after-sale service, which, in this instance, is ¥200.

Step-by-step explanation:

A student is determining whether to buy a smart cellphone from Orange Inc., evaluating options based on personal valuation and prices at three different stores. First, the net benefit from each option should be calculated. To calculate the net benefit, subtract the selling price of the phone from the individual’s valuation of the product (including any services).

For Store A: Valuation of black cellphone (¥1700) + Valuation of after-sale service (¥500) − Price (¥2000) = Net benefit (¥200).

For Store B: Valuation of pink cellphone (¥2500) − Price (¥2400) = Net benefit (¥100).

For Store C: Valuation of black cellphone (¥1700) − Price (¥1800) = Net benefit (−¥100).

The best option is to purchase from Store A since it offers the highest net benefit.

The opportunity cost of buying from Store A is the next best alternative forgone, which in this case is buying the pink cellphone from Store B. The marginal benefit is the additional benefit of purchasing the phone with after-sale service over just the phone itself, which is ¥200. The marginal cost is the additional cost incurred from purchasing the option with the after-sale service compared to without, which is ¥300 (¥2000 - ¥1700).