Answer :
You would be indifferent to buying the blanket for 20 shekels now or 25 shekels in one year if the interest rate is 25%. This is because the present value of the 25 shekels in one year would be equal to the 20 shekels you would pay now.
To calculate the present value of the 25 shekels in one year, we use the formula:
PV = FV / (1 + r)^n
Where PV is the present value, FV is the future value, r is the interest rate, and n is the number of years.
Plugging in the values we have:
PV = 25 / (1 + 0.25)^1
PV = 25 / 1.25
PV = 20
So the present value of the 25 shekels in one year is equal to the 20 shekels you would pay now. Therefore, you would be indifferent to buying the blanket for 20 shekels now or 25 shekels in one year if the interest rate is 25%.
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You would be indifferent between paying 20 shekels now or 25 shekels in a year if the interest rate is 25%. If it's lower, you'd prefer to pay now, and if higher, you'd prefer to pay later.
A trader in Babylon offers to sell you a blanket for 20 shekels, and another offers the same blanket for 25 shekels with a payment deferred for one year. You would be indifferent between the two options if the value of the money you would pay later (the 25 shekels) is the same as the value of the money you would pay now (the 20 shekels). This concept involves the time value of money.
To determine when you would be indifferent, you would need to calculate the current value of the 25 shekels due in one year. If the prevailing interest rate is 25% per annum, paying 25 shekels next year is equivalent to paying 20 shekels today. If the interest rate is lower, current payment would be preferable, and if it's higher, deferred payment would be better.
