Stan Bought a Car Three Years Ago for $20 000

question 41

Essay

Stan bought a car three years ago for $20 000. Recently he got a promotion and is deciding whether to keep his old car or to buy a new one. His dealer told him that the current market price of his old car is $15 000. The car maintenance costs are $1 000 now, and they are going to increase each year by at least $500. Stan compares his old car with a new one that, he calculates, would have an equivalent annual cost of $4 100. What is Stan's optimal decision if his current interest rate is 7%?

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Definitions:

Social Goods

Goods that benefit all members of society and whose consumption does not reduce their availability to others.

Nonrival

A characteristic of a good whereby its consumption by one individual does not reduce the amount available for consumption by others.

Strategic Behavior

Actions taken by firms or individuals with the aim of influencing the market or competitors to achieve a particular outcome or advantage.

Product Differentiation

A strategy that firms use to achieve market power. Accomplished by producing goods that differ from others in the market.