Joe Blow lives in a small town in southern Minnesota which has very limited shop

Question

     Joe Blow lives in a small town in southern Minnesota which has very limited shopping opportunities. There are two metropolitan areas within a fifty mile radius with major retailers, malls and many stores scattered throughout the area.    One area is Rochester, Minnesota where clothing purchases are not subject to sales taxes and is about a two hour drive roundtrip. The other area is La Crosse, Wisconsin where clothing purchases are subject to a 6% sales tax, and is about an hour roundtrip.  

     Mr. Blow can also shop online.   Currently, there are no sales taxes collected by online retailers.    But, returns are costly because Mr. Blow has to repack the items and take them to the local post office (which takes about 20 minutes roundtrip).   The online retailers he uses pay the postage for returns.

    Mr. Blow needs to purchase some new suits which he cannot get in town.   Normally, he does not have trouble finding clothes that fit because he is almost a perfect medium.

a. Identify the costs for Mr. Blow to purchase in a store.

b. Identify the costs for Mr. Blow to purchase online

c. He does some research and finds that the suits he wants sell for $300 in Rochester, $295 in La Crosse, and $290 on line.    If Mr. Blow buys his suit in Rochester, what does that indicate about his views of the costs of buying online?

Explanation / Answer

Ans: a) The costs for Mr Blow if he purchases in a store can be : price of the clothes as well as the travel cost for the roundtrip (in case he visits Rochester) and price of clothes along with sales tax and roundtrip travel cost (if he goes to Wisconsin). There are also opoortunity costs associated with the time he invests in going and shopping.

b) In case he purchases online, the costs involved would be the price of the goods purchased, the travel time to the post time and the travel expenditure.

c) If he buys the product from Rochester at $300 while it was available online for $290, it suggests that he had apprehended that there can be a case of returning the product which would lead to costs higher than if he purchased it elsewhere summed with the returns cost borne would exceed $300 at which he can buy it from Rochester. Thus, this sums up to the fact that the travel expenditure to Rochester would cost him lesser than the if he had to go to the post office for returns and then purchase it elsewhere.

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