Income and Substitution Effects on a Lender's Choice

Marco's Feasible Frontier When Lending

A Loan as an Alternative Store of Value

Evaluating Strategies for a Surplus

Evaluating Wealth Preservation Strategies

A farmer has a surplus of grain after a bountiful harvest, far more than she can consume before it spoils. She wants to use this surplus to provide for her consumption in the following year. Why is lending the surplus grain to a neighbor, in exchange for a promise of repayment with additional grain next year, a superior strategy compared to simply storing the grain in her barn?

For an individual with a surplus of a perishable good, the only advantage of lending it out instead of storing it is the ability to earn interest on the loan.

An individual has a surplus of a perishable good (e.g., grain) and wants to use it to provide for consumption in a future period. Match each strategy or concept with its most accurate description in this context.

Comparing Lending to Storing

A farmer has a surplus of 100 bushels of grain that will spoil if not consumed within the current season. A neighbor, who is a reliable borrower, proposes to borrow the 100 bushels and repay the exact same amount—100 bushels—of fresh grain next season. From a purely financial perspective, why might the farmer agree to this 0% interest loan?

A farmer has a surplus of 100 bushels of a perishable grain. If the farmer chooses to store the grain for one year, 20% of it will spoil. Alternatively, the farmer can lend the entire 100-bushel surplus to a neighbor. The neighbor will repay the loan in one year. Which of the following repayment offers from the neighbor represents the least amount of grain that would still make lending a financially better choice for the farmer compared to storing it?

Evaluating a Below-Principal Loan Offer

Maximizing the Value of a Perishable Asset

Interest as an Incentive for Lenders