Question 4: Lord and Chauffer An English lord buys every year a new top hat for 10. After one year of use it is not fit for a lord; so he sells it to his chauffer for 5. This story repeats itself every year. Observation: a lord wears a new top hat for 5 and his chauffer wears a used top hat for 5. Funny. But also educational. Assume That a new top hat was bought on 1/1/20XX [and the old top hat was delivered to the chauffer]; That this scenario will be repeated in perpetuity! On 1/1/20XX ( after buying a new hat and trasfering the old one to chauffer, the lord has an option to pay 200 for the manufacturers agreement to deliver in perpetuity a new top hat on every 1/1. [The going interest rate for manufacturers and lords is 5% p/a.]. Lord offers the chauffer to pay 100 (i.e., half) for the right to get the used top hats in perpetuity instead of paying the annual 5. [ He pays half anyway, right?] The chauffer tells that he is ready to pay for the used top hats perpetuity 50; otherwise he plans to buy the used ones for 5 every year in perpetuity. Does it make sense? Is the chauffer trying to hard barging or he knows something about his borrowing costs? Draw from this example conclusion about who buys new items and who buys them [much cheaper] second hand.