A world traveler prepares to leave the comforts of home for a back to nature visit to Gilligan's Island, where all transactions are conducted in coconuts and the banking system is completely undeveloped. The traveler can buy coconuts for $2 each before the journey. If he fails to bring enough coconuts with him and runs out, he must get some coconuts flown in at a cost of $5 each. If he finishes his vacation and has leftover coconuts he can cash them in when he returns home, but will receive only $1.50 per coconut. What is his loss per unit if he overstocks on coconuts prior to leaving home?

Question

Quizplus · Accepted Answer

To determine the best choice, we need to compare the different costs of buying, flying in, and cashing in coconuts. If the traveler buys coconuts before the trip and has leftovers to cash in afterward, the total cost per coconut would be $2 (buying) - $1.50 (cashing in) = $0.50 loss. 
If the traveler runs out and needs to fly in coconuts, the cost per coconut would be $5. This is a loss of $3 per coconut compared to buying before the trip. 
Therefore, it is better to overstock on coconuts before the journey, as the loss per unit is only $0.50. This is the lowest loss compared to buying on the island or flying in coconuts.

A World Traveler Prepares to Leave the Comforts of Home