You drive 8000KM a year any buy gas at $0.70 per liter. Except for differences i

Question

You drive 8000KM a year any buy gas at $0.70 per liter. Except for differences in annual cost, you are indifferent between driving a 10 year old Ford (rental fee is $600/year and 10L/100KM gas rating) or a 10 year old Honda (rental fee is $1000/year and a 4L/100KM gas rating). Which car should you drive? At what price of gas would you be indifferent between the 2 cars?

So far I worked out that the Ford will cost $560 to operate on gas, but $1160 in total with rental fee ([10L x 8000KM]/100KM, * by 0.70). The Honda worked out to $224 on gas and $1224 with rental fee, so the best choice is the Ford.

I am stumped on what price of gas would lead you to being indifferent. If I made an indifference chart, what would I use as my coordinates and margins? Thanks in advance for your help.

Explanation / Answer

For the price of gas that would make you indifferent, use the same formula you used, equate the total cost of the ford and the honda and introduce a variable P for the price of gas: Price of Ford=Price of Honda -->600+10*8000/100*P=1000+4*8000/100*P -->600+800*P=1000+320*P -->800P=400+320P -->800P-320P=400 -->480P=400 -->P=400/480=0.833

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