The Economist looks at how much cash you should have in your pocket.

The textbook economic model says you should keep your pockets bulging with cash. According to Harvard's Greg Mankiw, given a few reasonable assumptions about how much an imaginary professor spends each day in cash, the time it takes to visit an ATM, the value of his time, and the interest rate in his account.

The Baumol-Tobin model yields a very specific prediction: The prof should take out $1200 from his bank three times a year and hold an average of $600 in his wallet.

But almost nobody does this, which poses a puzzle. According to Mr Mankiw, the fear of losing one's wallet or of getting mugged doesn't get you far. He says his students are attracted to the idea that cash "burns a hole in your pocket" while a check card doesn't. True for some people, perhaps.

Work it out. Work out what you are worth an hour and how long it takes you to get cash out of an ATM.

Then work out how often you don't have cash and a friend pays...

Via [Economist; Anorak]

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