When purchasing autos and other durable goods, consumers tend to use discount rates that are inversely proportional to their income, so the discount rates are lower for consumers with higher income. The key reason for this behavior is that:

Question

Quizplus · Accepted Answer

High income consumers tend to have lower opportunity costs for money, meaning they have more resources and flexibility to allocate their funds. This allows them to use lower discount rates when purchasing durable goods or making long-term investments. Lower income consumers, on the other hand, may face more constrained budgets and higher opportunity costs for their money, which leads them to use higher discount rates. Option A is not completely incorrect, as lower income consumers may face more cash constraints, but it does not fully explain the behavior of using higher discount rates. Option C is incorrect as it confuses the distinction between nominal interest rates and discount rates.

When Purchasing Autos and Other Durable Goods, Consumers Tend to Use