Question: Assume you are looking to purchase an assortment of weekly supplies - milk, cereal, bread, eggs, fruits, vegetables, dish-washing liquid, soap, toothpaste etc. Would you purchase from (a) the neighborhood grocery store or (b) the far-away grocery store given the following facts and assumptions.
Facts:
- Total cost of goods in neighborhood grocery store: $50
- Total cost of goods in far-away grocery store: $40 (i.e.: 20% cheaper in other words)
- The far-away grocery store is located 10 miles away compared to the neighborhood grocery store; so the additional fuel cost of driving is $1 each way to the far-away grocery store; also, the additional driving time is 20 minutes each way to the far-away grocery store.
Assumptions:
- Assume both stores provide goods of equal quality (this becomes a little arguable with fruits and vegetables, but let's assume this for now)
- Assume that both stores provide similar quality of experience (e.g. equally long queues, equally crowded so much so that your chance of ramming into a running 3 year old are equally good, and whatever else meets your discerning eye)
- Assume that irrespective of which store you visit, your chances of meeting with an accident (in case of India: hitting a milkman if not a cow), of getting robbed, of meeting friends, of meeting someone you'd like to avoid, etc. are identical in case of either store.
- If the above assumptions are insufficient for some of you, let me bring in a catch-all clause - "there is nothing hidden/tricky in these assumptions; just focus on the facts section above."
Take a coffee-break to just think through while I take my tea-break ... let me give you a clue - "Money Value of Time" (not "Time Value of Money" that is well-known in Finance). I will explain in detail when I get back. Meanwhile.. socho socho.. (a) or (b). For those in Northern Virginia - I am asking you to choose between the likes of Giant/Safeway vs. the Korean store/Walmart.
For those not wanting a coffee-break, you can watch this commercial..
-------------------------------------------------------------------------------------------------------------
Alright, if you are back, the answer is - "sorry it was a trick question; shopping at either store is equally good." Here's why:
- Let's look at the calculations in a conventional manner first. The saving from going to the far-away grocery store ought to be $50 - $40 - ($1)x2 = $8.
- So where does that $8 disappear per my theory? It disappears in the 20+20 = 40 minutes that you spend driving. I call that "Money Value of Time", and it disappears at the rate of $12 per hour for a person earning at roughly $50 per working hour. My calculations are below:
------------------------------------------------------------------------------------------------
[A] $50 -> Hourly wage rate (Assumption)
[B] $400 -> Pre-tax earning per day = [A] x 8 hours
[C] $268 -> Post-tax earning per day = [B] x 0.67
[D] 14 -> Non-sleep/non-rest hours during a work day (Assumption)
[E] $19 -> Earning per non-sleeping/non-resting hour = [C] / [D]
[F] 230 -> Total working days per year counting weekends, vacation, and holidays (Assumption)
[G] $12 -> (Working days adjusted) Earning per non-sleeping/non-resting hour = [E] x [F] / 365
------------------------------------------------------------------------------------------------
NOTE: The reason I account for sleep hours, weekends, vacations etc. - is that these are essential for you to recharge yourself. There is no meaning in working 24 hours a day, OR at least calculating your time in that manner.
I am open to any criticisms of my computations. I know there certainly will be, and I concede there are going to be drawbacks and limitations. I am no economist; all I am trying to do is to make you think in ways an average person is not taught to.
Use your imagination in applying these numbers to your everyday life. Whatever you do, please always remember that there are certain things in life which are "priceless". For everything else, there is $12 per hour.
I'll leave you with a few examples to ponder over:
------------------------------------------------------------------------------------------------
[1] Cost of waiting in *ANY* queue for 20 minutes
[2] Cost of taking your friend to a movie that he/she doesn't want to see OR more generally, making another person spend time on an activity that does not interest him/her
[3] Cost of you spending your time on an activity that does not interest you
[4] Cost of booking your flight ticket with the best deals available OR generally, making a purchase decision
[5] Cost of watching the sun set
[6] Cost of letting snow flakes fall on your face
[7] Cost of reading a newspaper
[8] Cost of watching a Test match for 5 days
[9] Cost of raising a child (Do yourself a favor please - adjust for inflation)
[10] Cost of calling your parents - and telling them you care!
4 comments:
Interesting. Please also add, cost of the time taken to do all these stupid calculations rather than just follow your instincts!!!
It took me about 5 hrs to think through but the point is that I enjoyed it more than watching a movie, so it is worth the time I spent on it. My other point is that instinct has to be used judiciously. There's nothing instinctive about your choice of grocery stores for everyday life.. Is there?
Interestingly for me, you've reminded me if my next article which in fact is .. About instincts!
i need to get paid for giving you these ideas.
interestingly, how do you value your enjoyment of working this out over 5 hours and you consider it time well spent; effectively, as per your calculations, you spent $60 doing this and you felt it was worth more.
how do we know the enjoyment of driving for 20 mins or spending more time away from home, alone with your thoughts? thus, there is a value or worth of enjoyment that comes in and instinct is linked to that; thus, when your instinct guides you to the distant store, a factor in consideration is your enjoyment. for eg, you may perceive that the pleasure of shopping in a far away place is more pleasurable or you may perceive the goods to be better or you may like the sales girls there or you just want to ogle at some goods and feel better!! thus, there is an enjoyment factor which cannot be easily measured and thus, being guided by instincts is actually quite good.
I thought in my example, that I mentioned something like 'all other things being equal' between the 2 grocery stores.. it obviously isn't equal if you want some time to drive alone OR find shopping experience better in one of the grocery stores.
What's important here is distinguishing between activities that provide you an experience that isn't worth counting in $ terms vs. those that are worth counting in $ terms. By default, the line distinguishing the two is blurred. I am attempting to steer audience to see that line clearly, in their terms of course.
Forget my examples for a second, if you think deeply, there's probably at least 1 thing you do in your daily life where you've spent time where you are certain it is not worth.
Post a Comment