last word You are given an old car by your uncle, who wants you to keep it in working condition
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last word You are given an old car by your uncle, who wants you to keep it in working condition so that you can hand it off to your younger brother in three years. It will cost you $1,500 per year to keep it in working condition for your brother. If you skip maintenance altogether, the car will die after two years, but you can pocket the maintenance costs. What will you be tempted to do? Would higher maintenance costs make you more or less likely to do what your uncle wants? Explain. |
Explanation
The person would be required to incur $1500 each year till the subsequent three years for being able to hand over Product P to the younger ones after the third year. As such, the marginal cost of keeping Product C maintained in the third year is $1500, while the marginal benefit of doing the same is the value placed on the use of the car for that specific year. If maintenance is not performed for either of the years, Product P would depreciate to zero value at the end of the second year but, the person would save $3,000 that otherwise would have been spent as maintenance cost.
Thus, the marginal benefit from not doing the maintenance is $3000. The marginal cost incurred for not performing the maintenance is nothing but the marginal benefit would be $3000. As such, the person would be more induced to not doing the maintenance. However, not performing the maintenance would be against the relative's will since the latter wants the person to maintain Product C and hand over the same to the younger siblings.
If the marginal cost increases above $1500 per year, the person would be more tempted toward not maintaining Product P.
Verified Answer
The person is less likely to pursue the maintenance costs of Good C.
The higher maintenance cost induces the person to ignore doing the maintenance work and incurring costs for the same.
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