Assume that an individual with an opportunity cost of time of $20 per hour has to choose between renting four apartments. The rents of the four apartments and the individual's monthly commuting time to work are shown in the following table
Calculate the direct cost, indirect cost, and total cost that the individual will incur if she rents any of these apartments. Also, determine the apartment that is optimum for the individual. Graph the total cost involved for the various choices.
Apartment Monthly Commuting Time (hours) Rent ($)
1 60 2,800
2 90 2,200
3 120 1,500
4 150 1,400
Direct cost of renting Apartment 1 = $2,800
Indirect cost of renting Apartment 1 = 60 × $20 = $1,200
Total cost of renting Apartment 1 = $2,800 + $1200 = $4,000
Direct cost of renting Apartment 2 = $2,200
Indirect cost of renting Apartment 2 = 90 × $20 = $1,800
Total cost of renting Apartment 2 = $2,200 + $1,800 = $4,000
Direct cost of renting Apartment 3 = $1,500
Indirect cost of renting Apartment 3 = 120 × $20 = $2,400
Total cost involved in renting Apartment 3 = $1,500 + $2,400 = $3,900
Direct cost of renting Apartment 4 = $1,400
Indirect cost of renting Apartment 4 = 150 × $20 = $3,000
Total cost involved in renting Apartment 4 = $1,400 + $3,000 = $4,400
From the above estimations, the total cost is least if the individual rents Apartment 3. Hence, renting Apartment 3 is optimum for the individual.
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