A recent college graduate has obtained employment at a major financial institution in the big city. Since she just graduated, she has decided to continue to rent her college apartment in the suburbs and make the daily commute to the big city for work. She currently pays $1,000 per month to rent an apartment in the suburbs. She works at the bank five days a week and it takes her one hour each way to commute from her home to her office.

According to the assumptions of the bid-rent model, what should this recent grad be willing to pay in rent per month to live in the big city if her hourly wage rate is $20? (In your calculations, assume there are four weeks in a given month.)

(A) $1,400

(B) $1,000

(C) $800

(D) $1,800

D) $1,800

Explanation:

The Bid-rent model is a theory that majorly assumes that consumers will usually be willing to pay the maximum price in order to get rent that is close to the a Central Business District. The theory assumes that the closer the proximity to offices, the higher the price the user will be willing to pay for rent.

Based on the assumption of the theory, we calculate the maximum the College Graduate will be willing to pay

1) Current payment on a monthly basis = $1,000

2) work days = 5 days per week x 1 hour to work and 1 hour from work

The total commuting per week = 5 days a week x 2 hours = 10 hours

The monthly commuting in a standard month of 4 weeks = 4 x 10 hours = 40 hours

3) Current hourly wage rate $20, we can determine how much she will be able to maximize if she moves to the city and then saves the travel time

= $20 x 40 hours (commuting hours) = $800

As such, the College Graduate should willingly pay this $800 above the current $1000 of rent in order to cut out the commuting hours

The total she will be willing to pay in rent = Initial $1,000 + $800 she can save on cutting the travel time to work $1,000 + $800 = $1,800