Initial Cost and Life Cycle Cost JenkinsImagine 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 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 money up front to save a lot of money in the long run. At times, psychological studies have shown consumers appear to assign entirely whimsical values to money, values that change depending on time and circumstances.In recent years, these apparently irrational patterns of human behavior have become a subject of intense interest among economists and psychologists, both for what they say about the way the human mind works and because of their implications for public policy.How, for example, can the United States move toward a more efficient use of electricity if so many consumers refuse to buy energy-efficient appliances even when such a move is in their own best interest?At the heart of research into the economic behavior of consumers is a concept known as the discount rate. It is a measure of how consumers compare the value of a dollar received today with one received tomorrow.While consumers were very much aware of savings to be made at the point of purchase, they so heavily discounted the value of monthly electrical costs that they would pay over the lifetime of their dryer or freezer that they were oblivious to the potential for greater savings.Gas water heaters, for example, were found to carry an implicit discount rate of 100 percent. This means that in deciding which model was cheapest over the long run, consumers acted as if they valued a $100 gas bill for the first year as if it were really $50. Then, in the second year, they would value the next $100 gas bill as if it were really worth $25, and so on through the life of the appliance.Few consumers actually make this formal calculation, of course. But there are clearly bizarre behavioral patterns in evidence.?Consumers ?Choices About Money Consistently Defy Common Sense.? Malcolm Gladwell, The Washington Post, February 12, 1990. ?1990, The Washington Post Company.Problem:There are usually two styles of appliances available, regular and energy efficient. Compare a regular and energy efficient model of an appliance and determine when the cost for the two models is the same.Process:Pick an appliance (refrigerator, oven, stove, dishwasher, disposal, hot water heater, freezer, microwave, washing machine, dryer) and find comparable models of regular and energy efficient. You may use newspapers, the Internet,or visit a store such as Sears to gather your data for this project.Standard Format:Name(s) and box number on the first lineSkip a lineDate submitted and class (MA120)Project number and nameSubmission:This is a one page write-up using a word processor. Make sure you include your source of data and the cost equations associated with each appliance. Your answer should be the last line on the page.Submit in class or under the office door.ORDERR THIS ESSAY HERE NOW AND GET A DISCOUNT
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