Chapter 28, Problem 2CYU

a)

To determine

Whether charging 1% fee on card transactions affects the opportunity cost or benefit of holding.

Explanation of Solution

Money usually doesn't offer anything in return. Therefore, taking advantage of people's lack of cash increases their opportunity cost. However, in this situation, I found that the merchant charged him a $1.00 fee on debit/credit card transactions for her purchases under $50. This increases the benefits of holding cash as consumers save money by paying cash.

where holding money is considered less risky than lending it or investing it in another asset.

b)

To determine

Attracting more business, interest on deposits to be increased.

Explanation of Solution

The increased interest paid on a 6-month CD increases the opportunity cost of holding cash because you have to pay higher interest to hold cash.

c)

To determine

Rise in the cost of food.

Explanation of Solution

Since many grocery purchases are made in cash and a large increase in the cost of groceries increases the utility of holding cash, an increase in the cost of groceries ultimately increases the utility of holding cash.