Question

During the gasoline crunch in the mid and late seventies, the price of gas was kept below the market-clearing price. Often this policy resulted in long lines. Assume two possible states of the world:

1) Gas costs $1.00 a gallon with no waiting

2) Gas costs $0.60 a gallon, but requires half an hour wait

Howard Outoluck is unemployed and figures his time is worth nothing. He also has a 20-gallon tank What is the total cost for Howard to fill his gas tank in the two scenarios given above? Which scenario would Howard prefer? *Be sure to consider the total opportunity cost in this example.

Answer 1

Answer : For 1st scenario : The cost of 1 gallon is $1. So, to fill the tank of 20 gallons Howard Outoluck's total cost is (1 * 20) = $20.

For 2nd scenario : The cost of 1 gallon is $0.60. So, to fill the tank of 20 gallons Howard Outoluck's total cost is (0.60 * 20) = $12.

Now, if Howard Outoluck choose the 1st scenario then he have to pay $20 for 20 gallons. But if he choose the 2nd scenario then he pays only $12 for 20 gallons. So, his total opportunity cost for choosing 1st scenario is getting 20 gallons at $12 only where by choosing 1st scenario he gets 20 gallons by paying $20.

But if Howard Outoluck choose the 2nd scenario then he have to wait 1/2 hour to get 1 gallon of gasoline. So, to get 20 gallons of gasoline Howard Outoluck have to wait for (1/2 * 20) = 10 hours. Therefore, the total opportunity cost for choosing 2nd scenario is 10 hours.

As Howard Outoluck is not employed and as his time's worth is nothing, hence Howard Outoluck will prefer 2nd scenario.