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Suppose the nominal interest rate is 3 percent, the cost of going to the ATM is $1.50, you have a 12 percent probability of having your cash lost or...
9. Suppose the nominal interest rate is 3 percent, the cost of going to the ATM is $1.50, you have a 12 percent probability of having your cash lost or stolen, and you spend $5 each day.
a. What is your total cost of holding cash as a function of the number of days between trips to the ATM?
b. How often will you go to the ATM to minimize your costs?
10. Suppose you have a 20 percent probability of having your cash lost or stolen, and you spend $25 each day. Your total cost of holding cash is (182.50/T) + (3.75 × T).
a. What is your cost of going to the ATM?
b. What is the nominal interest rate?
c. How often will you go to the ATM to minimize your costs?
