Some of the following everyday problems may be solved using economic analysis. I

Question

Some of the following everyday problems may be solved using economic analysis. Identify the ones that can be solved strictly from an economic perspective. What are some of the other factors that needed to be considered in addition to the economic perspective?

i. A money market account in a foreign bank pays 4% interest compared to a local bank.

ii. An out of town bank offers an interest rate of 12% on a credit card compared to a local bank that offers a credit at 15% interest rate with 1% cash bonus on all purchases.

iii.Buying 12 tubes of toothpaste at a cost of$ 1.00 per tube on sale compared to paying

$2.00 a tube every month as needed.

Explanation / Answer

i.

Interest of local bank should be considered before investing. If the local bank pays higher interest compare to foreign bank 4% rate, money should be invested in local bank only.

ii.

Credit card should be taken from out of town bank, since it has the lower interest rate, 12%. The local bank charges 15% interest and 1% cash bonus. Therefore, the effective interest rate becomes (15% - 1% =) 14% and it is still higher than the interest rate of out of town bank.

iii.

Toothpaste is not a perishable good. It could be purchased in bulk if discount offered and could be used throughout the year. Therefore, purchasing 12 tubes at a time is beneficial because of paying the discounted price $1.

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