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Exercise 2 ' Pawn broking is one of the oldest sources of credit in the wortd. A pawn shop offers loans in exchange for items such as jewellery which are held by the shop until the loan is repaid. Such shops are mainly used by people on low incomes. In Texas, the maximum interest rate that can be charged is 20% per month. According to a study of pawn shops in Texas, default rates are lower when items of sentimental value such as rings rather than items of equivalent resale value such as TV screens are held by the shop. a. Draw a diagram with \"Consumption now' on the horizontal axis and 'Consumption later' on the vertical axis. The consumer has an initial endowment of $100 new and $0 in the future. Draw a feasible set. indifference curves. initial endowment and optimal choice for this consumer. The consumer prefers consumption now over consumption later. b. Now assume that the consumer decides to go to a pawn shop for a loan of $50 at an interest rate of 20%. Draw a new diagram representing the old and new feasible set, indifference curves and optimal choices. Why someone might choose to use a pawn shop? '_\"" ... _____ c. De me the term that Is used for the items held by the shop (such as jewellery). and expiain its role In the pawn broking business. \"" ' d. Comment on the statement that pawn shops are \"one of the oldest sources of credit In the world'. Why do you think this' Is the case? " e. Suggest an explanation for the differential default rates on the type of item held by the pawn shops. " "