Fuel Efficiency
Economics Problem Set Two:
A previous post considered household payments on vehicle
loans and gasoline. The household was
assumed to purchase both a SUV and a sedan and use both cars for 10 years.
This post asks the reader to build on a modified SUVSEDAN
Problem with different data and different assumptions.
Question One: The table below has fuel efficiency and
purchase price (not MSRP) data for four vehicles.
Overall Fuel Efficiency

Purchase Price


Ford Explorer

23

$33,000

Honda Pilot

21

$35,000

Toyota Prius

42

$25,000

Toyota Corolla

35

$17,000

The household drives 35,000 miles per year. 60% of driving occurs in the SUV and 40% in
the sedan.
Analyze each of the four SUV/SEDAN combinations.
The household buys both the SEDAN and the SUV at the
beginning of a 10year period. The
household takes out a sixyear loan and makes an initial down payment of 30%
for each car.
The loan interest rate is 5.0%.
The price of gasoline is $4.00 per gallon.
Analyze each of the four SUV/SEDAN combinations.
Find the following:
The monthly household gasoline bill
The monthly car payments
The present value of all gasoline consumed over the period.
The present value of the vehicle purchase costs over the
period.
The total present value of all payments
Discuss travel related costs for the four SUV/SEDAN options
under the assumptions given in this problem.
Question Two: Redo the analysis above but assume that the
household purchases the two vehicles with a 10% down payment and that the
interest rate on the loan is 12%.
Discuss the impact of the higher financing costs on the
decision to purchase fuel efficient vehicles.
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