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Imagine that your friend borrows EUR 100 from a pay-day loan establishment

Economics

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Imagine that your friend borrows EUR 100 from a pay-day loan establishment. After one week, it wants the principal plus 10 percent interest back. But your friend will not have that kind of money: so, instead, they go to another establishment and borrow the money they owe the first one. They do this for one year. Interest rates do not change from one establishment to another, or from one week to another. For (a)-(b) to get the full points you need to write down all the steps of your calculations. (a) How much money will they owe at the end of the year? (b) What is the total amount of interest that they will owe at the end of the year, in EUR terms? What is the total amount of interest that they will owe at the end of the year, expressed as a fraction of the principal? (c) You later learn that at the time when your friend borrowed money, they were holding stocks they had received as a present from their parents for their 18th birthday. Does this mean that they are violating an assumption of the neo- classical model and if so, which? Which behavioural explanations might be relevant? (Answer to (c) should be no more than 3-4 sentences.) (d) Can behavioural economics help explain why people take payday loans? (Answer to (d) should be no more than 5 sentences.) (e) You have recently been hired as a behavioural economics advisor to the government. Your role is to balance the considerations of giving people in need access to credit, while making sure that the poorest are not exploited. What would you suggest regarding the regulation of payday loan establishments? (Answer to (e) should be no more than 5 sentences.)