Answer to Question #119049 in Financial Math for dalveer

Question

. Sara is considering two offers to purchase a car. Offer A is for $35000 consisting of an
immediate $10,000 down payment with the $ 25,000 balance payable 1 year later. Offer
B is for $33,500 made up of a $5,500 down payment and the $ 28,000 balance payable in
6 months.
a. If money can earn 4% what is the current economic value of each offer?
b. Other things being equal, which offer should Sara accept? What is the economic
advantage of the preferred offer over the other offer?

Answer 1

a.

Proposition A.

10000+25000-25000*0.04=34000

Proposition В.

5500+28000-28000*0.04/2=32940

b.

The most profitable option B. Since this cost will be lower. The principle of relative advantages is that the consumer chooses, with equal utility, options for acquiring the good that has a lower value in monetary terms.