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Your friend makes a comment about how expensive the baseball card pack was that he purchased. He says 10 years ago he could buy a pack of baseball cards for $5. Assuming inflation is 3%, compunded continuously, how much did he pay for the pack today?

Round your answers to the nearest cent (hundredth).

User Gieun
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1 Answer

5 votes

Answer:

$6.75

Explanation:

In order to calculate the cost of the baseball card pack today, taking into account 3% continuous compounding inflation over 10 years, we can use the formula for continuously compounded interest:


\sf A=\ P \cdot e^(rt)

Where:

  • A is the final amount (the cost today)
  • P is the initial amount (the cost 10 years ago)
  • r is the annual inflation rate (3% or 0.03 as a decimal)
  • t is the number of years (10 years)

In this case:

  • P = $5
  • r = 0.03
  • t = 10

Substitute these values into the formula and simplify:


\begin{aligned} \textsf{ Final Value (A) } & = \$ 5 \cdot e^(0.03 \cdot 10) \\\\ &= \$ 5 \cdot e^(0.3) \\\\ & = \$ 5 \cdot 1.349858808 \\\\ &= \$ 6.749294038\\\\ &= \$ 6.75 \textsf{ in nearest cent(hundred )}\end{aligned}

0ur friend paid approximately $6.75 for the pack of baseball cards today.

User DobbyTheElf
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