Gemma considers buying a rare Pokémon card for $20,000 with a plan to sell it in 20 years and to buy a house worth $200,000. Price of the house doesn’t change over time. a) A collector offers a contract agreeing to buy the card from Gemma for $200,000 in 20 years. • Should Gemma buy the card and sign the contract if the interest rate is 7.5%? • Should Gemma buy the card and sign the contract if the interest rate is 10%? • Should Gemma buy the card and sign the contract if the interest rate is 12.5%? • Should Gemma buy the card and sign the contract if the interest rate is 15%? • Find the exact interest rate at which Gemma would be indifferent between (i) buying the card and signing the contract and (ii) not buying the card. b) Gemma buys the card and realizes that its price increases by 23% every year!1 In how many years will Gemma be able to afford a house? How much money will she have for decorating her new house?
Finance, based on a problem from “Principles of Economics” by N. Gregory
Mankiw
Gemma considers buying a rare Pokémon card for $20,000 with a plan to sell it in 20 years and
to buy a house worth $200,000. Price of the house doesn’t change over time.
a) A collector offers a contract agreeing to buy the card from Gemma for $200,000 in 20 years.
• Should Gemma buy the card and sign the contract if the interest rate is 7.5%?
• Should Gemma buy the card and sign the contract if the interest rate is 10%?
• Should Gemma buy the card and sign the contract if the interest rate is 12.5%?
• Should Gemma buy the card and sign the contract if the interest rate is 15%?
• Find the exact interest rate at which Gemma would be indifferent between (i) buying the
card and signing the contract and (ii) not buying the card.
b) Gemma buys the card and realizes that its price increases by 23% every year!1 In how many
years will Gemma be able to afford a house? How much money will she have for decorating
her new house?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
