Question

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 stores. Consumers incur a transaction cost to shop, primarily the opportunity cost of their time. This transaction cost consists of a fixed cost of 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 shoppers 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.) Let Q be the quantity of output or the number of items purchased and brought home. Let p1 be the price of a store item and let p2 be the traveling cost of going to and from a store. In terms of Q, p1, and p2, the average cost of purchasing Q items from one store (AC1) is AC,enter formula) and the average cost of purchasing Qitems from three stores (AC3) is AC3(enter formule) (Properly format your expressions using the tools in the palette. Hover over tools to see keyboard shortcuts. E.g. a subscript can be created with the_ character.)

Answer 1

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Tc_1 = p_1 times Q + p_2 Ac_1 = p_1 times Q + p_2/Q AC_1 = p_1 + P_2/Q AC_3 = ? TC_3 = P_1 times Q + 3P_2 3 time fixed cost added AC_3 = P_1 times Q + 3p_2/Q AC_3 = P_1 + 3p_2/Q Ac_3 = p_1 + 3p_2/Q