Problem 1
In which of the following cases is time inconsistency likely to be at work? [LO 8.1\(]\) a. A child plans to become a doctor when he grows up, but a month later reads a book about firefighters and decides to become a firefighter instead. b. A student keeps intending to finish reading War and Peace-next week. c. A parent plans to enroll his child in art class but enrolls her in dance class instead. d. A beginning piano player plans to practice three times a week but frequently practices only once a week.
Problem 2
You would like to save more money. Which of the following strategies will help you overcome time inconsistency? [LO 8.1] a. Deciding how much you need to save. b. Setting up a savings account. c. Putting reminders in your calendar to make deposits. d. Enrolling in an automatic-transfer program that will move a specified amount of money from your checking account to your savings account each month.
Problem 3
You're seated at a banquet that is beginning to become boring. Which of the following pieces of information are relevant to your decision to stay or go somewhere else? [LO 8.2] a. Another party is happening at the same time, and you've heard that it's fun. b. The dinner you were served was only so-so. c. You haven't eaten dessert yet, and it looks delicious. d. You paid \(\$ 30\) to attend the banquet. e. The other party has a cover charge of \(\$ 10\).
Problem 4
You just spent \(\$ 40\) on a new movie for your collection. You would have preferred the director's cut but discovered when you got home that you bought the theatrical version. The store you bought the movie from has an "all sales final" policy, but you could resell the movie online for \(\$ 30\). The director's cut sells for \(\$ 50 .\) By how much would you need to value the director's cut over the theatrical version for it to make sense for you to sell the version you bought and buy the director's cut?
Problem 5
Suppose you're bowling with friends. You've already played one game and are trying to decide whether to play another. Each game costs \(\$ 6\) per person, plus a one-time rental fee of \(\$ 5\) for the bowling shoes. It would take another hour to play the next game, which would make you late to work. Missing an hour of work would mean that you would lose pay at a rate of \(\$ 12\) per hour. Based on this information, how much would you have to enjoy the next bowling game, expressed in terms of dollars, to play another game?
Problem 6
During a holiday party at work, you pay \(\$ 2\) to buy a raffle ticket for a 160 -gigabyte iPod. You win the drawing. Based on a little research online, you discover that the going rate for a hardly used 160-gigabyte iPod is \$200. [LO 8.3] a. What was the opportunity cost of acquiring the iPod? b. What is the opportunity cost of choosing to keep the iPod?
Problem 7
Jamie is saving for a trip to Europe. She has an existing savings account that earns 2 percent interest and has a current balance of \(\$ 4,500\). Jamie doesn't want to use her current savings for vacation, so she decides to borrow the \(\$ 1,500\) she needs for travel expenses. She will repay the loan in exactly one year. The annual interest rate is 5 percent. \([\mathrm{LO} 8.4]\) a. If Jamie were to withdraw the \(\$ 1,500\) from her savings account to finance the trip, how much interest would she forgo? b. If Jamie borrows the \(\$ 1,500\), how much will she pay in interest? c. How much does the trip cost her if she borrows rather than dips into her savings?
Problem 8
Suppose you have accumulated a credit card balance of \(\$ 500\), at an annual interest rate of 10 percent. You are also planning to open a new savings account that accumulates interest at an annual rate of 3 percent. You just got your paycheck and have \(\$ 200\) that you can use either to pay down your debt or open your savings account. [LO 8.4] a. If you use the full \(\$ 200\) to pay down your debt, what will your credit card balance be in one year? Assume no additional credit card payments during this time. b. If, instead, you put the full \(\$ 200\) into your savings account, what will be the balance in your savings account in one year, assuming you make no additional deposits during this time? What will your credit card balance be, assuming you make no additional payments during this time because your payment requirements have been deferred for one year? c. In one year, how much money will you have lost if you deposit the \(\$ 200\) in your savings account compared to paying down your credit card?
