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
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Identify the acts that constitute investment.
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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?
The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $1.5 million. If it would cost $2 million to finish development and make the product, you
Example: U(X,Y) = (XY)-5, Px =2, Px = 1, M = 10
• What will be the consumer's optimal consumption?
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Economics: Principles & Policy
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- The 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_forwardConsider 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_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
- Anna'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_forwardConsider a new business that invests $20 million into a plant to manufacture loaves of bread. The market for bread is say around 100 million loaves and the new firm expects that it will be able to obtain a market share of around 5%. At that level of production, the total cost of production is $10 million. Let us say that it targets a 20% return on its investment. What should the price of a loaf of bread be? Use the principle of target rate of return pricing. If the mark-up rate is 10% what will the full-cost price be?arrow_forwardarrow_forward Question Asked Jun 23, 2020 1 views Management of Ben Services identified two groups of individuals that would be interested in the vacation package consisting of room and board and/or entertainment. The maximum amount that group 1 is willing to pay for room and board is GHC 2500 and for entertainment is GHC 500. For group 2, the maximumamount they are willing to pay for room and board is GHC 1800 and forentertainment is GHC 750. Although Ben is not able to identify members of either group, it does know that each group values the components of the package differently. Assuming there are an equal number of members in each group and that the total membership in each group is a single individual. If the marginal cost of providing the service (room and board and/or entertainment) to each group is GHC 1000. i. If AG Travel and Tour wants to charge a package price, what is the highest price it can charge? ii. What profit will AG Travel and Tour make if it…arrow_forward
- Sarah is considering two investment proposals. Proposal A is to purchase a new computer. Proposal B is to purchase a new printer. She will not buy the printer unless she buys the computer. The relationship between Proposals A and B is best described by which of the following? a. B and A are mutually exclusive b. B is contingent on A c. A is contingent on B d. Not enough information is given to determine a relationshiparrow_forwardThe diagram below 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 statement is correct? [ Only One Option correct ] GIVE EXPLANATION FOR EACH OPTION. A. Going from scheme 1 to scheme 2, the substitution and income effects have opposite effects on period 2 consumption.B.Marco can do better than consumption choice B by investing all of his grain and consuming the output in period 2.C. Marco is less impatient at B than at AD. Marco can do better than consumption choice B by investing all of his grain and borrowing against his period 2 output.arrow_forwardRue operates a food truck on Florida beaches, where she sells paninis and drinks, which she can sell for $8.00 and $4.00, respectively. Rue uses all of the money she makes to purchase theme park tickets, which cost $96.00, and her only other income comes from dividend payments of $32.00 from her investment portfolio. Let ?1 represent paninis, ?2 represent drinks, ? represent tickets, and ? represent dividend income. Complete Rue's budget equation: 8 ?1 + 4 ?2 + 32 = 96 ? Two of Rue's friends are coming to town,arrow_forward
- (ii) Assume that you have an income of £20,000 in each of two periods (1 and 2) and can lend and borrow at a 10% rate. Suppose your utility function is: U(C,C,)= 50+C, +C, +C,C, (a) What is your opportunity set? (b) Calculate the optimum amount of consumption in each period.arrow_forwardPotatoes cost Janice $0.50 per pound, and she has $5.00 that she could possibly spend on potatoes or other items. Suppose she feels that the first pound of potatoes is worth $1.50, the second pound is worth $1.14, the third pound is worth $1.05, and all subsequent pounds are worth $0.30 per pound. Instructions: Enter your answers as a whole number. a. How many pounds of potatoes will she purchase? pound(s) of potatoes b. How many pounds will she purchase if she has only had $2.00 to spend? pound(s) of potatoesarrow_forwardWrite short notes explaining the meaning and significance of the following concepts in economic theory:(a) Expected utility maximisation;(b) X efficiency and technical efficiency; and(c) Perfect contestability.arrow_forward
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