Question
john and bella are planning to buy new pair of scissors for next Hedge Trimming Contest (this year's gathering was cancelled!). The event will take
john and bella are planning to buy new pair of scissors for next Hedge Trimming Contest (this year's gathering was cancelled!). The event will take place 240 days from now. They each have different value of time. Let us denote their monthly interest rates as:
ijohn and ibella, respectively. There are two options which enable them to purchase the scissors after 240 days from now:
1] Allocate $275 now and put it in a saving account which earns 0.01% per day.
2] Save whenever you can in a piggy bank and then allocate $281.68 after 240 days.
3] Buy the pair of scissors now and keep them in free-of-charge storage for 240 days.
Due to rise in prices, the same pair of scissors which cost now $275 will cost $281.68 after 240 days.
a] Let us assume for now that they find, from an economic perspective, that all plans; 13, equivalent and that it does not matter which option is chosen as they are rationally the same. What is the value of time of john?
b] Is it possible for john and bella to agree on three plans while having two different values of time. That is, is there a possibility that ijohn ibella ?
c] Let us otherwise assume that they both looked at those plans and disagreed on the preference. It turn out that, based on rational economic analysis, john prefers Plan 1 while bella prefers Plan 2. Who has a higher value of time? Why?
NOTE:
Please assume: that a calendar year has 365 days
Please assume that a calendar month has 30 days
Please assume that interest is compound unless otherwise mentioned
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