Microeconomics (2nd Edition) (Pearson Series in Economics)
2nd Edition
ISBN: 9780134492049
Author: Daron Acemoglu, David Laibson, John List
Publisher: PEARSON
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Chapter 15, Problem 3P
(a)
To determine
The option with higher present value when interest rate is
(b)
To determine
Change in the option having higher present value when interest rate decreases to
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Suppose a person has a total credit card debt of $1,100 that has a 11 % yearly interest rate. This person also has a savings account with $5,500
that pays 1 % interest per year. Despite the net loss, the person keeps both.
Calculate how many times the person appreciates the $1 of savings more than $1 of credit card debt if the person relates similarly to both values of
percent paid and received, Enter your answer in the box below and round to two decimal places if necessary.
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After graduation, you face a choice. You can work for a multinational consulting firm and earn a starting salary (including benefits) of
$40,000, or you can start your own consulting firm using $5,000 of your own savings. If you keep your money in a savings account,
you can earn an interest rate of 7 percent. You choose to start your own consulting firm. At the end of the first year, you add up all of
your expenses and revenues. Your expenses include $14,000 for rent, $1,000 for office supplies, $24,000 for labor, and $4,500 for
telephone expenses. After operating your consulting firm for a year, your total revenues are $88,000.
Instructions: Enter your answers as a whole number.
a. What is your accounting profit?
$
b. What is your economic profit?
$
%24
Assume that your rich aunt has given you $25,000 in a gift. You have come up with three ways to spend (or invest) the capital. First, you want (but do not need) a new car to make your home and social life brighter. Second, you can invest the money in the common stock of a high-tech company. Price is expected to grow by 20 percent a year, but this option is very risky. Third, you can put the money into a three-year deposit certificate with a local bank and receive 6 percent annually. The third alternative carries little risk.
a. If you plan to buy the new vehicle, what is the cost of that option for the opportunity? Explain what you think in your own words.b. If you invest in the popular high-tech stock, what is the cost of that option for the opportunity? Explain what you think in your own words.
Chapter 15 Solutions
Microeconomics (2nd Edition) (Pearson Series in Economics)
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