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Wednesday, July 23, 2008

Horse Trade

A man decides to buy a nice horse. He pays $60 for it, and he is very content with the strong animal. After a year, the value of the horse has increased to $70 and he decides to sell the horse. But already a few days later he regrets his decision to sell the beautiful horse, and he buys it again. Unfortunately he has to pay $80 to get it back, so he loses $10. After another year of owning the horse, he finally decides to sell the horse for $90.

The Question: What is the overall profit the man makes?

Answer: Consider the trade-story as if it describes two separate trades, where:

* In the first trade, the man buys something for $60 and sells it again for $70, so he makes a profit of $10.
* In the second trade, the man buys something for $80 and sells it again for $90, so he makes again a profit of $10.

Conclusion: The man makes an overall profit of $10 + $10 = $20.

You can also look at the problem as follows: the total expenses are $60 + $80 = $140 and the total earnings are $70 + $90 = $160. The overall profit is therefore $160 - $140 = $20.

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