Reference no: EM13179805
Imagine two refrigerators in the appliance section of a department store. One sells for $700 and uses $85 worth of electricity a year.The other is $100 more expensive but costs only $25 a year to run. Given that either refrigerator should last at least 10 years without repair, consumers would overwhelmingly buy the second model, right?
Well, not exactly. Many studies by economists have shown that in a wide range of decisions about money - from paying taxes to buying major appliances - consumers consistently make decisions that defy common sense. In some cases - as in the refrigerator example - this means that people are generally unwilling to pay a little more more money up front to save a lot of money in the long run. (Source: Gladwell, Malcolm, "Consumers Often Defy Common Sense," Copyright 1990, The Washington Post.)
We can apply the concepts of the solution of a linear system to this situation. Over a 10-year period, one refrigerator will cost $700 + 10($85) = $1550, while the other will cost $800 + 10($25) = $1050, a difference of $500.
1.In how many years will the costs for the two refrigerators be equal? (Hint: Solve the system y = 800 + 25x, y = 700 + 85x for x.)
2.Suppose you win a lottery and you can take either $1400 in a year or $1000 now. Suppose also that you can invest the $1000 now at 6% interest. Decide which is a better deal and by how much.
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