After graduation, you decide to travel to Europe for an indefinite period of time. All of your money is deposited in a savings account that earns 0.5% interest per month. Every time you withdraw money from the ATM, your bank charges you a $4 fee regardless of how much money you withdraw. You know that you spend $50 in cash per month at a constant rate throughout the month. You wish to figure out what is the optimal strategy for withdrawing cash from the ATM without running out of cash.
a) What is your optimal strategy for withdrawing cash from the ATM?
How often should you withdraw money from the ATM?
How much money should you withdraw each time you go to the ATM?
b) What amount will your bank take from your account each month under this withdrawal plan?
c) Comment on the increase in cost if you must withdraw in $20 denominations. What does this say about the robustness of the EOQ?