2. Jennifer, a homeowner, is planning to add new mulch to all the landscaping be

Question

2. Jennifer, a homeowner, is planning to add new mulch to all the landscaping beds around her house. She has determined the quantity of mulch she will need and has identified these two options for getting the mulch to her house:

1. She can have all the mulch delivered to her yard in one dump truck for $450.

2. She can make four trips to the garden center with her pickup truck and haul it herself. It will cost her $75 per load for the mulch, plus $25 in fuel and truck wear per load. She estimates it will take about five hours to haul and unload all four loads.

Answer the following questions about Jennifer's situation:

a. How is opportunity cost relevant to this scenario?

b. What dollar value of time would be necessary to make the total cost (including opportunity cost) of both options equal?

c. If Jennifer’s opportunity cost of time is greater than the value found in part b, which option would she choose to minimize cost?

Explanation / Answer

(a)

Opportunity cost is the cost of next best alternative foregone.

In given case, Jennifer can either get mulch be delivered to her yard by dump truck or can bring the mulch herself in her pick-up truck.

If she decides on bringing the mulch in her pick-up truck then this means that she has to make four trips to the garden center and have to spend five hours in loading and unloading all the mulch.

As we can see that in compariosn to first option, in second option, Jennifer is spending 5 hours of her time in getting mulch.

If she chooses option 1 then she can save these 5 hours and can utilize them for some other purpose.

So, if she decides to bring the mulch all by herself then she loses the opportunity to use 5 hours somewhere else.

This means utilization of 5 hours for bringing mulch results in cost being incurred in terms of less time being available for other activities.

Undertaking other activities is the alternative of time utilized for bringing mulch.

As stated above, cost of next best alternative foregone is the opportunity cost.

Thus, if she decides to bring mulch herself, she has to incur opportunity cost in terms of less time being available for other activities.

In this way opportunity cost is relevant to this scenario.

(b)

There are two options before Jennifer to bring mulch to yard -

Option 1

She can have mulch delivered in one dump yard truck for $450.

Total cost by option 1 = $450

Option 2

She can bring mulch herself. In this case, she has to make 4 trips to garden center.

Cost per load of mulch = $75

Cost of fuel and truck wear per load = $25

Total explicit cost in option 2 = ($75 * 4) + ($25 * 4) = $300 + $100 = $400

She has to spend 5 hours in bringing all the mulch herself.

Thus,

Time cost = Total cost in option 1 - Total explicit cost in option 2 = $450 - $400 = $50

Total cost in option 2 = Total explicit cost in option 2 + Time cost = $400 + $50 = $450

Thus, dollar value of time that would be necessary to make the total cost (including opportunity cost) of both options equal is $50.

(c)

If Jennifer's opportunity cost of time is greater than the value found in part (b) then her total cost of bringing the mulch all by herself will be greater than the total cost of bringing mulch through dump yard truck.

As total cost of bringing mulch through dump yard truck would be lower, she should choose option of bringing mulch through dumpyard truck to minimize cost.

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