Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Chapter 24, Problem 2TY
To determine
Identify the acts that constitute investment.
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Consider the diagram:
FF (10% interest rate)
FF (78% interest rate)
Julia's 100
endowment
38
36
Julia's IC (higher utility)
Julia's IC
Julia's IC (through point F)
Julia's IC (lower utility)
56 58
Consumption now (S)
35
91
Consumption later ($)
With the use of an example, briefly explain the main difference between the ex-ante and the ex-post opportunity cost of capital. Why does this matter for the evaluation of an investment decision? In what ways can managers utilise the distinction between ex-ante and ex-post opportunity cost of capital when deciding on the firm’s strategy?
A firm will invest in capital if...
the present value of the capital is greater than the market rate of interest.
the internal rate of return is less than the market rate of interest.
the internal rate of return is greater than the market rate of interest.
the present value of the capital is less than the market rate of interest.
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Economics: Principles & Policy
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- Suppose a consumer has $1500 in the current time period and $1100 in the future time period.Suppose also that the consumer can borrow and lend freely and, unless otherwise specified, borrowing and lending interest rates are the same. (a) If the interest rate between time periods is 50%, what is the budget constraint between consumption in the present and consumption in the future? (B) If the interest rate at which the consumer can borrow is 75% but the rate at which she can lend is25%, what is the budget constraint? (C) Suppose the interest rate is 50%. If the consumer has to pay a fee of 10% of the loan amount in order to borrow money, what is the budget constraint?arrow_forwardExample: U(X,Y) = (XY)-5, Px =2, Px = 1, M = 10 • What will be the consumer's optimal consumption? ●arrow_forward1. Consumption and saving definitions Suppose Karen gets a sales bonus at her place of work that gives her an extra $600 of disposable income. She chooses to spend $480 and save the remaining $120. Mathematically, it must always be true that: Consumption = =arrow_forward
- A consumption tax that replaces an income tax a) only taxes a household on the money it spends. b) discourages saving. c) would likely result in a lower level of saving than an income tax. d) ultimately taxes income twice—once when the household pays income tax and once when the household makes a purchasearrow_forwardThe diagram depicts Marco's choice of consumptions in periods 1 and 2. He has $100 worth of grain in period 1 and no income in period 2. Marco has two choices. In scheme 1, he can sell the grain that he does not consume and lend the money at 10%. In scheme 2, he can invest the grain that he does not consume (e.g. planting as seed) for a return of 50%. Which of the following statements is correct? Consumption later, $ 150 110 60 39 0 0 FF(lend at 10%) FF (invest at 50%) B 60 68 Consumption now, $ 100 Going from scheme 1 to scheme 2, the substitution and income effects have opposite effects on period 2 consumption. Marco can do better than consumption choice B by investing all of his grain and borrowing against his period 2 output. O Marco is less impatient at B than at A. Marco can do better than consumption choice B by investing all of his grain and consuming the output in period 2.arrow_forwardProblem 2. (Equilibrium with Intertemporal Choice) Consider an intertemporal choice problem with Ambrosia and Fergus. Ambrosia is an athlete with income of 4 when young and 1 when old, i.e, w (4, 1). Fergus is a manager who earns 1 when young and 4 when old, i.e., his endowment is w = (1,4). Ambrosia and Fergus have the same utility function given by where i = A, F. %3D a) Plot the Edgeworth box and mark the point corresponding to endowments of Ambrosia and Fergus (graph).arrow_forward
- Consider the following diagram: FF (10% interest rate) FF (78% interest rate) Julia's > 100 endowment G 38 36 Julia's IC (higher utility) Julia's IC Julia's IC (through point F) Julia's IC (lower utility) 35 56 58 91 Consumption now ($) Select one or more: а. If the interest rate is 10%, Julia will choose to borrow £91. b. If the interest rate is 10%, Julia could borrow up to £91. O c. If the interest rate is 10%, Julia will need to pay the bank £58 in the second period. O d. If the interest rate is 78%, she will need to pay the bank $62, to the nearest dollar. Consumption later ($)arrow_forwardSuppose the savings rate (s) in the economy is 30%, GDP is $1,000, and investment can be expressed as I=s*Y. Calculate the level of investment in this economy. Question 9 options: 1) $600. 2) $330. 3) $300. 4) $150.arrow_forwardEconomics Which of the following situations represent saving? a) Mike borrows $8,000 from a bank and buys a truck for his personal use. b) John uses his $500 paycheck to buy stock in Microsoft. c) Austin borrows $9,000 from a bank to buy a truck to use in his lawn mowing business. d) Your roommate earns $2000 and spends itarrow_forward
- What is the formula for calculating Net Present Value (NPV)? a) NPV = Total Revenue - Total Costs b) NPV = Total Costs - Total Benefits c) NPV = Initial Investment - Total Revenue d) NPV = Total Benefits - Initial Investmentarrow_forward2. The company that you manage has already spent $5 million on developing a new product – a website that combines You Tube, Twitter, and Facebook – called You Twit Face. The development is not quite finished. It will cost an extra $3 million to finish development and complete the product. At a recent meeting, your salespeople report that the expected sales of your new product (if you finish) are $7 million total. If you do not finish developing the product you can sell the incomplete product to another company for $2 million. What is the MC of finishing the development? __________________ What is the MB of finishing the development? __________________ Should you finish the product? Why or why not? Use the idea of “thinking at the margin” to explain your answer.arrow_forwardAnna's investment is worth $2.5 million (decreased from $3.5 to $2.5 million) Elsa's investment is worth $2.2 million (increased from $2 to $2.2 million) For each of them write down the reference utility function (First determine the reference point (use a parameter) and derive reference utility function for each).arrow_forward
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