Q7: (10%) In the twentieth century, department stores and supermarkets largely r

Question

Q7: (10%) In the twentieth century, department stores and supermarkets largely replaced smaller specialty stores, as consumers found it more efficient to go to one store rather than many. Consumers incur a transaction or search cost to shop, primarily the opportunity cost of their time. This transaction cost consists of a fixed cost traveling to and from the store and a variable cost that rises with the number of different types of items the consumer tries to find on the shelves. By going to a supermarket that carries meat, fruits and vegetables, and other items, consumers can avoid some of the fixed transaction costs of traveling to a separate butcher shop, produce mart, and so forth. Use math to explain why a shopper’s average costs are lower when buying at a single supermarket than from many stores. (Hint: define the goods as the items purchased and brought home.)

Explanation / Answer

Here we have two situations,

1) shopper shopping at supermarket and

2) shopper shopping at small stores

As in the question they are asking us to express each items brought to home we will make some list of items that we have to buy for our home.

i. TV

ii. Vegetables

iii. Fruits

Now we take the situation where a shopper buys goods from a super market

i.Since the store is located at one place we dont have to go anywhere apart from super market so our travelling cost will be reduced, we take $ 10 for that.

ii.if you go to super market for buying TV, since the owner of the super market bruoght it directly from the company. Let us assume he paid $500 for that

iii.Vegetables : Since all the vegetables are available at one place and also they are brought directly from farmer they will be cheaper, let us assume he took $20

iv. Fruits : In this case also a shopper can get a almost all fruits at once place at cheaper price, Let us assume he took $15 fruits

Total cost = 10+500+20+15

                  = 545 $

so shopper spent $545 in the super market

Now we take the situation where a shopper buys goods from a small stores

i. Here since we dont get all the goods at one place we need to travel more and here more money will be used. Let us assume he spent $15

ii, TV : IN small shop the goods are not brought directly from company and they will buy small quantity so they will less discount, Also here the transportation charge and shop maintanace charge will included on the TV to get profit. So selling price will be more here. Let the price of the TV be $530

iii. Vegetables: Here the vegetables are not awailable at one place and we need to travel from one place to another place for different vegetables here our buying price will be more than the super market. Let assume he spent $25

Iv. Fruits : Here also the fruits are sold at different places and they are not brought directly from the farmer, the price of the fruite will be more than the super market. Let the amount be $20

Total amount spent = 15+530+25+20

                                   =$ 570

So the sopper is spending $25 more then super market, Average cost of the shopper is less at super market then the many stores.

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