Question

Suppose Joann wants to purchase a Toyota Camry that costs $20,000. Joann is willing to pay up to $22,000 for the car. Joann plans on keeping the car for 1 year and selling it.

Joann has $20,000 in an FDIC insured bank account that pays 1% over the course of the next year. Toyota will give Joann a $20,000 car loan at a fixed 4% interest rate with no money down. The loan is only for 1 year and the interest payment and principal payment are due at the end of the year.

Instructions:

Using the information in the preface fill in the blank information throughout the following steps of the economic decision making process to ascertain whether Joann should take out a $20,000 car loan or whether she should pay the car off and have no car loan.

Suppose that we are analyzing the scenario where Joann pays the car off and has no car loan, and we need to ascertain the MB and MC associated with the no car loan scenario. The following information is provided:

MB_{(No Car Loan)} = (What Joann is willing to pay up to for the car) = ?

MC_{(No Car Loan)} = (Cost of the car) = ?

Questions: What is the MB_{(No Car Loan)} and MC_{(No Car Loan)} ?

Group of answer choices

MB(No Car Loan) = $22,000; MC(No Car Loan) = $20,000

MB(No Car Loan) = $20,800; MC(No Car Loan) = $20,800

MB(No Car Loan) = $20,000; MC(No Car Loan) = $20,000

MB(No Car Loan) = $20,800; MC(No Car Loan) = $22,000

None of the available answers

Suppose that we are again analyzing the scenario where Joann pays the car off and has no car loan. The following information is provided:

Accounting Net Benefit_{(No Car Loan)} = MB_{(No Car Loan)} – MC_{(No Car Loan)} = ?

Question: What is the Accounting Net Benefit_{(No Car Loan)}  ?

Accounting Net Benefit(No Car Loan) = $20,000- $20,000= $0

Accounting Net Benefit(No Car Loan) = $22,000- $20,800= $1,200

Accounting Net Benefit(No Car Loan) = $20,800- $20,000= $800

Accounting Net Benefit_{(No Car Loan)} = $22,000- $20,000= $2,000

Suppose that we are now analyzing the scenario where Joann does not pay the car off and she takes a car loan out, and we need to ascertain the MB and MC associated with the car loan scenario. The following information is provided:

MB_{( Car Loan)} = (What Joann is willing to pay up to for the car) + (Amount Joann earned in her bank account) = ?

MC_{(Car Loan)} = (Cost of the car) + (Car loan interest paid over the year) = ?

Questions: What is the MB_{(Car Loan)} and MC_{(Car Loan)} ?

Group of answer choices

MB(Car Loan) = $22,200; MC(Car Loan) = $20,800

MB(Car Loan) = $22,800; MC(Car Loan) = $20,800

MB(Car Loan) = $20,800; MC(Car Loan) = $22,200

MB(Car Loan) = $20,800; MC(Car Loan) = $20,800

Suppose that we are again analyzing the scenario where Joann does not pay the car off and and takes out a car loan. The following information is provided:

Accounting Net Benefit_{(Car Loan)} = MB_{(Car Loan)} – MC_{(Car Loan)} = ?

Question: What is the Accounting Net Benefit_{(Car Loan)}  ?

Group of answer choices

Accounting Net Benefit(Car Loan) = $22,200-$22,200= $0

Accounting Net Benefit(Car Loan) = $22,200-$20,800= $1,400

Suppose that we now want to analyze the scenario where Joann pays the car off and has no car loan. We are provided the following information:

Economic Net Benefit_{(No Car Loan)} = Accounting Net Benefit_{(No Car Loan)} – Accounting Net Benefit_{(Car Loan)} = ?

Question: What is the Economic Net Benefit_{(No Car Loan)}  ?

Group of answer choices

Economic Net Benefit(No Car Loan) = $2,080-$2,000= $80

Economic Net Benefit(No Car Loan) = $1,400-$2,000= -$600

Economic Net Benefit(No Car Loan) = $1,400-$2,200= -$800

Economic Net Benefit(No Car Loan) = $2,000- $1,400=$600

Suppose that we now want to analyze the scenario where Joann does not  pay the car off and takes out a car loan. We are provided the following information:

Economic Net Benefit_{(Car Loan)} = Accounting Net Benefit_{(Car Loan)} – Accounting Net Benefit_{(No Car Loan)}

Question: What is the Economic Net Benefit_{(Car Loan)}  ?

Group of answer choices

Economic Net Benefit(Car Loan) = $2,600-$2,000= $600

Economic Net Benefit_{(Car Loan)} = $1,400-$2,000= -$600

Economic Net Benefit(Car Loan) = $2,000-$2,000= $0

Economic Net Benefit(Car Loan) = $1,400-$2,800= -$1,400

Which scenario has a positive accounting net benefit?

Group of answer choices

None of the available answers

The car loan scenario has a negative accounting net benefit, while the no car loan scenario has a positive accounting net benefit

Both scenarios have a positive accounting net benefit

The no car loan scenario has a negative accounting net benefit, while the car loan scenario has a positive accounting net benefit

If Joann decides to go with the “No Car Loan” scenario and pays the car off, what is the opportunity cost? (Name it and provide the amount)

Group of answer choices

Accounting Net Benefit( No Car Loan) = $2,000

Accounting Net Benefit(Car Loan) = $1,400

Economic Net Benefit(Car Loan) = -$600

Economic Net Benefit(No Car Loan) = $600

Accounting Net Benefit(Car Loan) = $20,800-$22,000= -$1,200

Accounting Net Benefit(Car Loan) = $20,800-$20,800= $0

If Joann decides to go with the “Car Loan” scenario and takes out a car loan, what is the opportunity cost? (Name it and provide the amount)

Group of answer choices

Economic Net Benefit(Car Loan) = -$600

Economic Net Benefit(No Car Loan) = $600

Accounting Net Benefit(Car Loan) = $1,400

Accounting Net Benefit( No Car Loan) = $2,000

Which scenario has a positive economic profit?

Group of answer choices

The no car loan scenario

None of the available answers

The car loan scenario has a positive economic profit, but the no car loan scenario has a negative economic profit

The car loan scenario

Which scenario has a positive economic profit?

Group of answer choices

The no car loan scenario

None of the available answers

The car loan scenario has a positive economic profit, but the no car loan scenario has a negative economic profit

The car loan scenario

Which scenario should Joann choose? Why?

Group of answer choices

She should choose the no car loan scenario. This is because the Economic Net Benefit(No Car Loan)= $600, which means that she will gain an additional $600 if she pays the car off versus taking out a car loan.

She should do neither because it is always better to save instead of consuming items.

She should choose the car loan scenario. This is because the Economic Net Benefit(Car Loan)= $600, which means that she will gain an additional $600 if she takes out a car loan versus paying the car off.

What is the percentage point difference (spread) between the interest paid rate in the bank account and the car loan interest rate?

Note:

Spread= (interest rate paid in the bank account) - (car loan interest rate)

Group of answer choices

Spread= 1%-4%= -3%

Spread= 6%-4%= 2%

Spread= 2%-4%= -2%

Spread= 5%-4%= 1%

Multiply the percentage point difference (spread) times the cost of the car. What figure do you get?

Group of answer choices

(Spread) x (Cost of the car)= .06 x $20,000 = $1,200

(Spread) x (Cost of the car)= -.02 x $20,000 = -$400

(Spread) x (Cost of the car)= -.03 x $20,000 = -$600

(Spread) x (Cost of the car)= .05 x $20,000 = $1,000

What do you think is causing the Economic Net Benefit_{(Car Loan)} to be negative?

The percentage point difference (spread) between the interest paid rate in the bank account and the car loan interest rate

The difference between the Accounting Net Benefit(No Car Loan) and the MB(Car Loan).

The difference between the Accounting Net Benefit(Car Loan) and the MB(Car Loan).

None of the available answers

Answer 1

According to the question we are given the case, so the different calculations are as follows:

Question 1]  What is the MB_{(No Car Loan)} and MC_{(No Car Loan)} ?

MB= marginal benefit

MC = marginal cost

MB_{(No Car Loan)} = (What Joann is willing to pay up to for the car) = $22000

MC_{(No Car Loan)} = (Cost of the car) = $20000

so option 1 is correct.

Question 2] What is the Accounting Net Benefit_{(No Car Loan)}  ?

Accounting Net Benefit_{(No Car Loan)} = MB_{(No Car Loan)} – MC_{(No Car Loan)}

_{=$22000-$20000=$2000}

_{so, option 4 is correct.}

Question 3] What is the MB_{(Car Loan)} and MC_{(Car Loan)} ?

MB_{( Car Loan)} = (What Joann is willing to pay up to for the car) + (Amount Joann earned in her bank account) = $22000+$[20000*1%] =$22000+$200=$22200

MC_{(Car Loan)} = (Cost of the car) + (Car loan interest paid over the year) = $20000+[$20000*4%]=$20800

so, option 1 is correct.

Question 4] What is the Accounting Net Benefit_{(Car Loan)}  ?

Accounting Net Benefit_{(Car Loan)} = MB_{(Car Loan)} – MC_{(Car Loan)} = $22200-$20800=$1400

so, option 2 is correct.

Question 5] What is the Economic Net Benefit_{(No Car Loan)}  ?

Economic Net Benefit_{(No Car Loan)} = Accounting Net Benefit_{(No Car Loan)} – Accounting Net Benefit_{(Car Loan)}

_{=$2000-$1400 =$600}

_{so, option 4 is correct.}

_{Question 6]} What is the Economic Net Benefit_{(Car Loan) ?}

Economic Net Benefit_{(Car Loan)} = Accounting Net Benefit_{(Car Loan)} – Accounting Net Benefit_{(No Car Loan)}

_{=$1400-$2000 = -$600}

so, option 2 is correct.

Question 7] Which scenario has a positive accounting net benefit?

according to the calculations done Accounting Net Benefit_{(No Car Loan) have positive effect.}

so, option 2 is correct.

Question 8] If Joann decides to go with the “No Car Loan” scenario and pays the car off, what is the opportunity cost?

opportunity cost is the forgone cost of gaining the proposal what we get.

so the forgone is Accounting Net Benefit_{(Car Loan)} of $1400

so option 2 is correct.

Question 9] If Joann decides to go with the “Car Loan” scenario and takes out a car loan, what is the opportunity cost?

so the forgone is  Accounting Net Benefit_{(No Car Loan)} of $2000

so, option 4 is correct.

Question 10&11]Which scenario has a positive economic profit?

The no car loan scenario

so, option 1 is correct.

Question 12] Which scenario should Joann choose? Why?

She should choose the no car loan scenario. This is because the Economic Net Benefit(No Car Loan)= $600, which means that she will gain an additional $600 if she pays the car off versus taking out a car loan.

so, option 1 is correct.

Question 13] What is the percentage point difference (spread) between the interest paid rate in the bank account and the car loan interest rate?

Spread= (interest rate paid in the bank account) - (car loan interest rate)

= $200- $800= $600

or = 1%- 4% = -3%

so, option 1 is correct.

Question 14] Multiply the percentage point difference (spread) times the cost of the car. What figure do you get?

(Spread) x (Cost of the car)= -.03 x $20,000 = -$600

so , ption 3 is correct.

Question 15] What do you think is causing the Economic Net Benefit_{(Car Loan)} to be negative?

here the main reason is the spread being caused by the interest paod and the car loan interest rate.

so, option 1 is correct.