Opportunity Cost and Marginal Analysis:
Professor Lagalo drives a 2000 Dodge Grand Caravan with 150,000 miles on it. He owns the van outright, and does not have a car loan payment. The current value of the van is about $3,000. Mrs. Lagalo does not particularly like the van and often gives reasons why they should replace it with a newer family vehicle. To Mrs. Lagalo’s dismay, Professor Lagalo recently spent about $1,000 in repairs on the van. Using marginal analysis and the concept of opportunity cost, explain why Professor Lagalo paid $1,000 in repairs on his current vehicle rather than purchasing a newer one. In your personal opinion do you think it makes more sense to keep an older vehicle until the annual repairs reach a certain threshold (Clark Howard’s benchmark is $2,000 per year), or to buy a new car every few years? Besides financial considerations, are there benefits from driving newer cars?
Follow-up question: The van’s air conditioner (AC) stopped working at the end of this past summer (thankfully not before!) In your personal opinion, how much should Professor Lagalo be willing to spend to fix the AC? Also, the power locks stopped working. How much would you be willing to spend to fix this additional issue?