An individual decides to rent an apartment for $7,000 per month. The commuting time from this apartment to his office is 80 hours per month
If the individual's opportunity cost of time is $30 per hour, calculate the direct cost, indirect cost, and total cost per month she would incur if she rents the apartment.
The direct cost of renting the apartment equals the monthly rent of the apartment. So, direct costs equal $7,000 every month.
The indirect cost of renting the apartment is equal to the commuting time expressed in dollar terms. Because the individual will spend 80 hours in commuting every month, and the opportunity cost of one lost hour is $30, her indirect costs equal $30 × 80 = $2,400 per month.
The individual's total cost equals the sum of direct cost and indirect cost. Therefore, total cost is equal to $7,000 + $2,400 = $9,400 every month.
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