On the following page, you will find an ad for energy efficient light bulbs. Above it, I provide some additional information. After reading this data, answer the following questions:

a) Suppose you are the head of a purchasing department of a large publicly traded company. On average, your firm uses each light bulb for 750 hours a year. Would you buy the energy efficient light bulb WITHOUT the possibility of a mail-in rebate?

b) Would you buy the energy efficient light bulb WITH the mail-in rebate?

c) What is the hourly energy cost that makes you indifferent between buying a normal light bulb versus buying the energy efficient light bulb at $10?

d) How would your answers to a) and b) change if the standard deviation of the life of a normal bulb is 300 hours?

e) Suppose you are considering purchasing the efficient light bulb for your home. Would your answers be the same?

AD for the energy efficient light bulb

The NYU Stern Office of Energy Planning and Management and the Environmental Concerns Organization are pleased to announce a special sales promotion of energy efficient light bulbs in celebration of Earth Day. General Electric compact fluorescent light bulbs will be sold at the Universitys cost of $10 each (including tax). This purchase can be coupled with a $5 mail-in rebate resulting in a net cost per bulb of $5. All members of the University community are invited to participate in the sale. Compact fluorescent bulbs use one-fourth the energy of regular light bulbs and last 10 times longer. Over its life a compact fluorescent bulb can save your household $50 in electricity cost.

Additional Information:

Cost of a normal bulb = $.50.

Electricity cost of running a normal light bulb: $0.0015 per hour.

All electricity bills are paid at the the end of the year.

Average Life of a normal light bulb: 750 hours.

Standard Deviation of the life of a normal bulb: 200 hours

Risk free Rate: 10%

Inflation Rate: 0%

Market Premium for Risk: 6%.