What is meant by comparative statics? Assume that a firm wants to set up a factory. It considers four different locations
The rent of the factory space and the time taken to transport the products from each of the locations to the market is shown in the table below. It is also given that the opportunity cost of time is $10 per hour.
a) Which is the optimum location?
b) If the opportunity cost of time changes to $30 per hour, is there any change in the optimum?
Location Time Taken to Transport Products to the Market (hours per month) Rent ($ per month)
1 180 3,000
2 150 3,200
3 100 3,600
4 60 4,100
Comparative statics is the comparison of economic outcomes before and after some economic variable is changed. For example, a consumer might want to rent a bigger apartment when his wealth increases. Here, the apartment choice is the economic variable that changes when wealth increases.
a) The opportunity cost of transporting the products to the market per month from Location 1 = 180 × $30 = $5,400.
Total cost of building the factory in Location 1 = $3,000 + $5,400 = $8, 400.
The opportunity cost of transporting the products to the market per month from Location 2 = 150 × $30 = $4,500.
Total cost of building the factory in Location 2 = $3,200 + $4,500 = $7,700.
The opportunity cost of transporting the products to the market per month from Location 3 = 100 × $30 = $3,000.
Total cost of building the factory in Location 3 = $3,600 + $3,000 = $6,600.
The opportunity cost of transporting the products to the market per month from Location 4 = 60 × $30 = $1,800.
Total cost of building the factory in Location 4 = $4,100 + $1,800 = $5,900.
b) From the above calculations, when the opportunity cost of time increases from $10 per hour to $30 per hour, the optimum location of the factory changes from Location 3 to Location 4.
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