Question

In June 2008, when gasoline prices were at an all-time high (more than $3.99 per gallon), Chrysler Motor Company promoted its Jeep vehicle with the offer of either $4,400 off the price of the vehicle or the guarantee that the buyer would not pay more than $2.80 per gallon of gas for the next 3 years (the details of the guarantee could vary by dealer) Required: 1. Assume that the Jeep vehicle you are interested in gets 15 mpg combined city/highway and that at the time of purchase, you expected gasoline prices to average $5.16 per gallon over the next 3 years. How many miles would you have to drive the vehicle in the next 3 years to make the guarantee more attractive than the $4,400 discount? (Do not round intermediate calculations. Round your final answer up to the nearest whole number.) 2. Assume the same information as in requirement 1, except the average price of gas for the next 3 years is not known and you are likely to drive 9,250 miles per year. What would the breakeven gasoline price in the coming 3 years need to be to make you indifferent between the two options? (Round your answer to 3 decimal places.) Miles to be driven over the three years must exceed 1 Breakeven average gasoline price 2.

Answer 1

solution Let the Indefference point in Miles be M. savings for the guarantee = savings for the discount ( 5-16 X (M/15)) - (280(M115)) = 4400 5.16 M - 2.80 M = 66000 M = 66000/ 2136 M = 27966 miles over theree years or 9322 miles ( 27966/3 per year Therefore, the Indeffierence the three years point in miles is 27966 miles over period or 9322 miles per year. Miles deriven over 3 years - 9250 miles x3=27750 miles Let the Indifference point in gasonline be G. [ GX (27750/45)]:- 4400 = 2.80 x ( 2915015) GX (27750/15) = 9580 G= 5.17 average gas price for the next three years.