Question

A car manufacturer offers either​ $2,000 cash back or zero percent financing for 5 years. A rational consumer will always take the cash back because money received today is worth more than money received in the future.true/false

Answer 1

Answer:

The answer is: true

Explanation:

Rational behaviour entails making decisions or taking actions that result in maximising utility or satisfaction. The time value of money dictates that the opportunity cost of foregoing earning potential today is the interest accrued on the savings for future use. A rational consumer who wants to maximise utility will always take the $2,000 dollar cash back since the implicit interest incurred by taking the 0% financing results in a lower future value (in 5 years).