Here’s a really cool research output on helping you decide just when do you buy that new car? Don’t be turned off by the maths – it’s worth reading through (click on the image below to enlarge)
Reference:
1) Akerlof, George A., Market for Lemons – Quality Uncertainty and the Market Mechanism. Quarterly Journal of Economics., (c) MIT Press., 1970.
2) Judd, Kenneth L., Numerical Methods in Economics., (c) MIT Press., 2002
3) Miranda, Mario J. and Fackler, Paul L., Applied Computational Economics and Finance., (c) MIT Press., 2002
4) “Are Lemons Really Hot Potatoes?,” Stern, Hartmann and Engers
5) “Automobile Maintenance Costs, Used Cars, and Adverse Selection,”
Stern, Hartmann and Engers
6) “Mileage Drives Used Car Prices,” Stern, Hartmann and Engers http://www.people.virginia.edu/resint/empiostf/empio.html
7) Graph of Death Rates for Imports and for Domestics taken from S Stern’s
website:
people.virginia.edu/resint/empiostf/selection_giffiles/deathpaths/
Oh, at New Car Smell! When do Ownership Costs justify a New Car’s Expense?
Each year, you face an awful decision: sell your car and buy a new one;
Get something back for the
old one, less transaction costs
You pay a huge amount
for your new(er) ride,
enjoying lower maintenance
costs & minimal failure risk,
Or keep your car, facing increased maintenance costs and risk of failure.
or suffer high maintenance
costs and failure rate,
Cbought +Cold – Ctransact
Either way, your car is in no way a positive-dollar-value asset, but rather
a life sentence of penury and obligation to minimize (Optimal Control!)
Each year’s decision depends on the following year’s value, which then
depends on that next decision and its value, depends on that next decision and its value, depends on that next decision and its value, …
Each time we solve this forward equation, our estimate improves.
(This, like most sensibly-constructed optimal control problems, is guaranteed to converge.)
Vbought+1
dVold+1
d
knowing that in a year you’ll
have an almost-as-new car.
choosing again next year
with an even older car
-CmaintÈb′ t -CfailureÈb′ t
-CmaintÈold – CfailureÈold
Va Optimal Value (better guess): Total Lifetime Forward Value of a car in state a.
Ca, s Strategic Cost: Costs incurred by following strategy s from state a
d Discount Factor: Converts next year’s dollars into this year’s.
Pa®b, s Transition Matrix: chance for entering each forward state b under strategy s
Vb Optimal Value (lucky guess): state b’s forward value if yo,adopt an optimal strategy.
Va = max :
-Ca, I + d Pa®b, I ×Vb strategy I
-Ca, II + d Pa®b, II ×Vb strategy II
»
-Ca,N + d Pa®b, N ×Vb strategyN
- +
+
0 10 20 30 40 50 60
500
1000
1500
2000
Escalation of Maintenance costs over time
Purchase price
of a Honda Accord
by age of car
5 10 15 20
5000
10000
15000
Akerlof, George A., e Market for “Lemons”:Quality Uncertainty and the Market Mechanism. e Quarterly Journal of Economics., e
MIT Press., 1970.Judd, Kenneth L., Numerical Methods in Economics., e MIT Press., 2002Miranda, Mario J. and Fackler, Paul L., Applied
Computational Economics and Finance., e MIT Press., 2002″Are Lemons Really Hot Potatoes?,” Stern, Hartmann and
Engers”Automobile Maintenance Costs, Used Cars, and Adverse Selection,” Stern, Hartmann and Engers”Mileage Drives Used Car Prices,”
Stern, Hartmann and Engers http://www.people.virginia.edu/~sns5r/resint/empiostf/empio.htmlGraph of Death Rates for Imports and
for Domestics taken from S Stern’s website: people.virginia.edu/~sns5r/resint/empiostf/selection_giffiles/deathpaths/
0 5 10 15 20 25 30 35
10 000
20 000
30 000
40 000
50 000
60 000
70 000
5 10 15 20 25 30
200
400
600
800
1000
1200
1400
Value (negative axis)
Age of Car
[Keep]
[Sell]
Depreciated Value
Maintenance
Scrappage
Risk
Best Entry Point
(a five yr old car)
Initial price
too high Paying too much
in maintenance &
They are probably the first non-animal, non-motor driven mode of land transportation for human beings. The first version known was the Draisine was made of a wooden frame with a seat, a steering mechanism at the front wheel, a back wheel and the rider could only push it. With the repeating environmental call to reduce our carbon footprint, bicycle lanes and cycling events are gaining popularity.
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