PROBLEMS the shop\'s manager finds that \"33 percent more for free\" sells a lot

Question

PROBLEMS the shop's manager finds that "33 percent more for free" sells a lot more coffee than "33 percent off." Are the store customers making a systematic error? Which is actually the better deal? LO8.2 Angela owes $500 on a credit card and $2,000 on a student loan. The credit card has a 15 percent annual interest rate and the student loan has a 7 percent annual interest rate Her sense of loss aversion makes her more anxious about the larger loan. As a result, she plans to pay it off first-despite the fact that professional financial advisors always tell peo- ple to pay off their highest-interest-rate loans first. Suppo Angela has only $500 at the present time to help pay down her loans and that this $500 will be the only money she will ave for making debt payments for at least the next year. If she uses the $500 to pay off the credit card, how much inter- est will accrue on the other loan over the coming year? the other hand, if she uses the $500 to pay off part of the student loan, how much in combined interest will she ow over the next year on the remaining loans? By how many dollars will she be better off if she uses One type of systematic error arises because people tend to think of benefits in percentage terms rather than in absolute ollar amounts. As an example, Samir is willing to drive 0 minutes out of his way to save $4 on a grocery item that ut he is unwilling to drive 20 min- utes out of his way to save $10 on a laptop that costs $400 at a local store. In percentage terms, how big is the savings on grocery item? On the laptop? In absolute terms, how big is the savings on the grocery item? On the laptop? If Samir willing to sacrifice 20 minutes of his time to save S4 irn one case, shouldn't he also be willing to sacrifice 20 minutes costs $10 at a local market. 4. of his time to save $10? LO8.2 2. Anne is a bargain-minded shopper. Normally, her favorite toothpaste costs the same at both of her local supermar kets, but the stores are having competing sales this week. At one store, there is a bonus offer: buy 2, get I free. At the other store, toothpaste is being sold at 40 percent off Anne instantly opts for the first offer. Was that really the less-expensive choice? (Hint: Is "buy 2, get 1 free" the On balances on the two same as 50 percent off) LO8.2 3. The coffee shop near the local college normally sells 10 ounces of roasted coffee beans for S10. But the shop sometimes puts the beans on sale. During some sales, it offers "33 per- cent more for free." Other weeks, it takes "33 percent off the normal price. After reviewing the shop's sales data S500 to completely pay off the credit card rather thatn partly paying down the student loan? (Hint: If you ow X dollars at an annual interest rate of Y percent, your annual interest payment will be X X Y, where the interest rate Y is expressed as a decimal.) L08.3

Explanation / Answer

Ans 3)

33% more for free would make 13.3 ounces of coffee for $10

33% off means we can have 10 ounces of coffee for $6.67 then if we try to calculate how much of the coffee we can buy with $10 when we have 33% discounts is equals to 100/6.67=300/20=15 ounces in $10 where in earlier case we were buying only 13.3 ounces coffee from $10

Hence 2nd option is better.

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