a) Jessica needs to pay off a loan. Doing so entails a cost of 1000 when...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
a) Jessica needs to pay off a loan. Doing so entails a cost of £1000 when she pays off her loan. However, if she doesn't pay off her loan then she will incur interest of £150. This means that paying off her loan in periodt generates a benefit of £1150 in period, t+1, because she has cleared her £1000 loan and avoids paying £150 interest. i. Assume Jessica is an exponential discounter. What is the maximum discount rate at which she will choose to pay her loan today? Assume her outside option is to not pay off her loan, and hence not incur the cost or gain the future benefit. Explain your reasoning. (5 marks) ii. Calculate the equivalent personal interest rate that corresponds to the personal discount rate you found in part (). (3 marks) iI. Now assume Jessica is a quasi-hyperbolic discounter. Assume she does not discount the future exponentially (so D=1). Assume she places a weight of 0.7 on future utility. Explain whether Jessica will plan to pay her loan off in the next period, and whether she will successfully carry out her plan. (5 marks) b) Jessica decides to implement a commitment device to make sure she pays off her loan straight away. Explain the idea of commitment devices as a tool for overcoming procrastination. Propose how Jessica's commitment device could work, explaining how it would change her incentives. (12 marks) a) Jessica needs to pay off a loan. Doing so entails a cost of £1000 when she pays off her loan. However, if she doesn't pay off her loan then she will incur interest of £150. This means that paying off her loan in periodt generates a benefit of £1150 in period, t+1, because she has cleared her £1000 loan and avoids paying £150 interest. i. Assume Jessica is an exponential discounter. What is the maximum discount rate at which she will choose to pay her loan today? Assume her outside option is to not pay off her loan, and hence not incur the cost or gain the future benefit. Explain your reasoning. (5 marks) ii. Calculate the equivalent personal interest rate that corresponds to the personal discount rate you found in part (). (3 marks) iI. Now assume Jessica is a quasi-hyperbolic discounter. Assume she does not discount the future exponentially (so D=1). Assume she places a weight of 0.7 on future utility. Explain whether Jessica will plan to pay her loan off in the next period, and whether she will successfully carry out her plan. (5 marks) b) Jessica decides to implement a commitment device to make sure she pays off her loan straight away. Explain the idea of commitment devices as a tool for overcoming procrastination. Propose how Jessica's commitment device could work, explaining how it would change her incentives. (12 marks)
Expert Answer:
Answer rating: 100% (QA)
6 A Commitmemt device way to doOR chamge ty punisha Callbeit f... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones
Posted Date:
Students also viewed these accounting questions
-
What is the highest discount rate at which the project would still be acceptable (i.e., a zero NPV)?
-
Rockness needs $40,000 to pay off a loan due on December 31, 2016. His plans included the making of 10 annual deposits beginning on December 31, 2007 in accumulating a fund to pay off the loan....
-
Suppose you choose to pay off a loan over 10 years instead of 5 years. The principal and interest rate are the same in both cases. Will the payment for the 10-year term be: (i) Half the payment for...
-
The following data have been extracted from the financial statements of Prentiss, Inc., a calendar-year merchandising corporation: Total sales for 2018 were $1,200,000 and for 2017 were $1,100,000....
-
SnagAJob. com surveyed 551 hiring managers to ask them what recruiters looked for when hiring seasonal employees. The following table shows the results: Response Percentage Positive attitude . 36...
-
Why is it important for the researcher and the marketing manager to discuss the accuracy level associated with the research project at hand?
-
Why should operations be described by verbs?
-
Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $500 and has an existing customer base of 600. Paul plans to raise the annual fee by 6 percent every...
-
On December 31, 2023, Berclair Incorporated had 400 million shares of common stock and 7 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2024,...
-
Two slender rods of negligible weight are pin-connected at C and attached to blocks A and B, each of weight W. Knowing that P = 1.260W and that the coefficient of static friction between the blocks...
-
ACTG 211, Fall 2023 Final Exam Review Problems Use the following information to answer Questions 1 - 5. Polaski Company sells a single product and carries no inventory. It reported the following...
-
Explain what is meant by Islamic financing. What are the different types of securities that are used in this sector? In this context, explain what is meant by a sukuk. Construct a practical Example...
-
Efficient Market Hypothesis: The Evidence Suppose XYZ plc announced this morning that its profit from last quarter has dropped 15 per cent compared to the previous quarter, and that its closing price...
-
F F Kwel services fire extinguishers and sprinkler systems and has annual agreements with its customers, which must be paid for at the commencement of the annual agreement. All agreements commence on...
-
Mara transferred assets to Con Co. on May 15, 2019. Mara acquired the assets on June 15, 2016. What is Con Co.'s holding period for the assets?
-
Why are sales forecasts so important to developing a firms financial plans?
-
ThisExcel file contains 3 tabs with the Income Statements, BalanceSheets and Statement of Cash Flows for the last 5 full fiscal years(2017-2021) for your company.Project To Do List: Overallyou w 0...
-
According to a New York Times columnist, The estate tax affects a surprisingly small number of people. In 2003, . . . just 1.25 percent of all deaths resulted in taxable estates, with most of them...
-
The Mawn Company bought land and built a warehouse during 2007. It debited the following related costs to an account titled Land and Buildings: Land purchase ......................$22,000 Demolition...
-
York Drug Company has two reportable operating segments, A and B. The 2007 condensed income statement for the entire company is as follows: Sales ............. $90,000 Cost of goods sold ..........
-
The Burrell Company purchased a machine for $20,000 on January 2, 2007. The machine has an estimated service life of five years and a zero estimated residual value. The asset earns income before...
-
Find the Laplace transform of the following signals and locate the poles and zeros of \(F(s)\). (a) \(f(t)=-8 u(t)\). (b) \(f(t)=0.5 t u(t)\). (c) \(f(t)=10 e^{-20000 t} u(t)\).
-
Find the Laplace transform of \(f(t)=-5 u(t)+5 e^{-5 t}\) \(u(t)-5 t u(t)\). Locate the poles and zeros of \(F(s)\).
-
Find the Laplace transform of \(f(t)=\delta^{\prime}(t)+\delta(t)-e^{-t} u\) \((t)\). Locate the poles and zeros of \(F(s)\).
Study smarter with the SolutionInn App