Consider a software firm with 10 workers, each of whom lives in a suburb due eas
ID: 1106543 • Letter: C
Question
Consider a software firm with 10 workers, each of whom lives in a suburb due east of the city center and commutes by automobile. The firm exchanges products and information with other software firms in the center. The savings in exchange costs from being the center as opposed to the suburb is $180 per day. The daily cost of automobile commuting from the suburb to the center (including the opportunity cost of time) is $10 per worker.
a) Suppose a large increase in the gas tax doubles the daily commuting cost. Where will the firm locate?
Explanation / Answer
The total savings from getting located at center is 180 dollars. If cost of commuting for 10 workers is $10 each, then net savings = $180 - $100 = $80
But if the opportunity cost increases from $10 per worker to $20 per worker, the total cost will become 200 dollars.
Hence, the net savings will become
$180 - $200= (-)20
Now, since first will end up losing 20 dollars in aggregate when it chooses central location, the firm will choose suburb location.