Karen is deciding whether to buy a suit that she wants as we

Karen is deciding whether to buy a suit that she wants, as well as where to buy it. Three shops carry the same suit. She can go to her local department store, located 15 minutes away from where she works, and pay $120 for the suit. She can travel to a shop across town, located 30 minutes away from where she works, and pay $90 for the suit. Finally, she can take a one-hour drive out of town to a neighboring city and pay $85 for the suit. Karen makes $80 an hour at work. She has to take time off work to purchase her suit, so each hour away from work costs her $80 in lost income. Assume that returning to work takes Karen the same amount of time as getting to a shop and that it takes her 30 minutes to shop. Answer the following questions, ignoring the cost of gasoline and depreciation of her car when traveling. The opportunity cost of Karen\'s time if she chooses to purchase the suit in the neighboring city is Assume that Karen takes opportunity costs and the price of the suit into consideration and that she exploits opportunities to minimize the cost of her suit. Given these assumptions, if Karen buys a suit, she will purchase it from

Solution

Local Department Store:

Opportunity cost is the value of money person sacrifice to purchase a dress.

Opportunity cost of time = 15 min to go + 15 min to come back + 30 min to shop = 60 min = 40

Total Cost = Opportunity cost of time + Price of a Dress = 40 + 120 = 160

Across Town:

Opportunity cost of time = 30 min to go + 30 min to come back + 30 min to shop = 90 min = 40 + 40/2 = $ 60

Total Cost = Opportunity cost of time + Price of a Dress = 60 + 90 = 150

Neighboring City:

Opportunity cost of time = 60 min to go + 60 min to come back + 30 min to shop = 120 min + 30 min

= 80 x 2 + 80/2 = 160 + 40 = $ 200

Total Cost = Opportunity cost of time + Price of a Dress = 200 + 85 = 285

Karen will minimize the cost of the dress if she buys it from the Across Town.