Curt pays a $200 annual fee at a fitness center rather than paying the $2 charge that it would cost if he paid by the visit. He intends to go 100 times in the year. He claims that the fee will act as a commitment device to help him follow his wish to exercise regularly and the per visit fee would not act as a commitment device. His friend tells him that the cost is $100 either way so his reasoning is false. Do you agree that the annual fee can act as a commitment device for Curt and the per visit fee would not? Explain your answer. Assume a zero interest rate so the timing of payments is not affected by foregone interest.
What will be an ideal response?
Curt is correct. An annual fee is a sunk cost and future decisions will be based on the costs and benefits relevant at the time of the decision. Because the annual fee reduces the cost of each visit to zero, Curt is more likely to go to the center on a regular basis and so the annual fee acts as a commitment device that will encourage him to stay fit and avoid the self control pitfall.
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What will be an ideal response?
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