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Answer both parts (a) and (b) of this question. (a) [10 marks] The University of Moneyland offers students two different options for paying the tuition
Answer both parts (a) and (b) of this question. (a) [10 marks] The University of Moneyland offers students two different options for paying the tuition fees for their three-year degrees. Students can either pay tuition fees of 15 .000 at the beginning of each year for the next three years; or they can pay a lump sum of 43,500 at the start of the rst year. The interest rate is r : 5% and is expected to stay at that level, and Students can borrow or lend any amount they want at this rate. What should a student do, pay 15,000 at the beginning of each year or pay the lump sum of 43,500 at the start of the rst year? Explain your answer. (b) George has 100 today and will receive another 100 tomorrow. He can borrow or lend at a xed interest rate of 6%. In this situation he chooses to lend. (i) [5 marks] Illustrate this choice using an appropriate diagram. (ii) [10 marks] Now suppose the interest rate falls to 3%. By decomposing the effect of the fall in the interest rate into a substitution effect and an income effect, discuss whether George will now choose to lend more or less than in the previous case. Is it possible that he will now choose to borrow? Explain
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