Janet Baker is deciding where to live during her second year in college. During her first year, she lived in the residence hall. Recently her friend Rachel asked her to share an off-campus apartment for the upcoming school year. Janet likes the idea of living in an apartment, but she is concerned about how much it will cost.
To help her decide what to do, Janet collected information about costs. She would pay $400 per month in rent. The minimum lease term on the apartment is six months. Janet estimates that her share of the utility bills will be $75 per month. She also estimates that groceries will cost $200 per month. Janet spent $350 on a new couch over the summer. If she lives in the residence hall, she will put the couch in storage at a cost of $35 per month. Janet expects to spend $7,500 on tuition and $450 on books each semester. Room and board at the residence hall would cost Janet $2,900 per semester (four months). This amount includes a food plan of 20 meals per week. This cost is nonrefundable if the meals are not eaten.
Questions A to G will help you analyze the information for this problem. Do not turn in your answers to these questions unless your professor asks you to do so.
A. Use ONLY the cost information collected by Janet for the following tasks.
1. List all of the costs for each option. Note: Some costs may be listed under both options.
2. Review your lists and cross out the costs that are irrelevant to Janet’s decision. Explain why these costs are irrelevant.
3. Calculate and compare the total relevant costs of each option.
4. Given the cost comparison, which living arrangement is the better choice for Janet? Explain.
B. Identify risks associated with the costs collected by Janet.
1. Determine whether each cost is likely to be (i) known for sure, (ii) estimated with little uncertainty, or (iii) estimated with moderate or high uncertainty.
2. For each cost that is known for sure, explain where Janet would obtain the information.
3. For each cost that must be estimated, explain why the cost cannot be known.
C. List additional information that might be relevant to Janet’s decision (list as many items as you can).
1. Costs not identified by Janet.
2. Factors (including risks) other than costs.
D. Explain why conducting a cost comparison is useful to Janet, even if factors other than costs are important to her decision.
E. Consider your own preferences for this problem. Do you expect Janet’s preferences to be the same as yours? How can you control for your biases as you give Janet advice?
F. Think about what Janet’s priorities might be for choosing a housing arrangement. How might different priorities lead to different choices?
G. Describe how information that Janet gains over this next year might affect her future housing arrangements.
Suppose Janet asks for your advice. Turn in your answers to the following.
H. Use the information you learned from the preceding analyses to write a memo to Janet with your recommendation and a discussion of its risks. Refer in your memo to the information that would be useful to Janet.
I. How did you decide what information to include in your memo to Janet? Write one or two paragraphs explaining your thought process.