If you knit or know of someone back home who does, check out Hilados de Alpaca in the commercial district. This is luxury clothier and the Michell Group's alpaca yarn outlet; choices include much sought after baby alpaca. While it may be several soles and lots of traffic lights to get there, it's worth it—you can't get 12 spools of pure baby alpaca yarn for S/60 any place else.
Av. Diagonal/Ramon Zavaleta N. 110 Wanchaq, Cusco, Peru