We then consider its consequences for the prices of

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Unformatted text preview: rent points in time and develop the main tool of project evaluation, the net present value rule. We then consider its consequences for the prices of assets in the market and develop the concept of the Law of One Price. When Competitive Market Prices Are Not Available Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker. When competitive prices are not available, we can no longer do this. Prices at retail stores, for example, are one-sided: you can buy at the posted price, but you cannot sell the good to the store at that same price. We cannot use these one-sided prices to determine an exact cash value. They determine the maximum value of the good (since it can always be purchased at that price), but an individual may value it for much less depending on his or her preferences for the good. Let’s consider an example. It has long been common for banks to try to entice people to open accounts by offering them something for free in exchange (it used to be a toaster). Suppose a...
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