ECONOMICS W/CONNECT+20 >C<
20th Edition
ISBN: 9781259714993
Author: McConnell
Publisher: MCG CUSTOM
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Chapter 8, Problem 6P
To determine
The interest that is given up.
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Suppose you have a monthly income of $1000, $850 in monthly expenses, and you can put money in a savings account that yields a monthly interest rate of 4%.
Now suppose you have an opportunity to invest your money at a 12% return. Further suppose you are able to borrow at 3%. Assuming you invest all of your money and then borrow against your future payout, show your trade-off between present and future consumption. If you still need to consume $850 in the present, how much will you have to spend in the future?
Suppose Latasha is a sports fan and buys only baseball caps. Latasha deposits $3,000 in a bank account that pays an annual nominal interest rate of
5%. Assume this interest rate is fixed-that is, it won't change over time. At the time of her deposit, a baseball cap is priced at $10.00.
Initially, the purchasing power of Latasha's $3,000 deposit is
baseball caps.
For each of the annual inflation rates given in the following table, first determine the new price of a baseball cap, assuming it rises at the rate of
inflation. Then enter the corresponding purchasing power of Latasha's deposit after one year in the first row of the table for each inflation rate. Finally,
enter the value for the real interest rate at each of the given inflation rates.
Hint: Round your answers in the first row down to the nearest baseball cap. For example, if you find that the deposit will cover 20.7 baseball caps,
you would round the purchasing power down to 20 baseball caps under the assumption that Latasha…
3) Marco has $100 worth of grain in period 1 but gets no grain in period 2. Marco
has two choices. He can store the grain that he does not consume in period 1. This
results in a loss of 20% of the grain due to pests. Assume that with this option he
will choose to consume 68 units of grain in period 1 and 26 units in period 2.
Instead, Marco can sell the grain he does not consume in period 1 and lend the
money from that sale to someone today at an interest rate of 10%. He can then
use the repayment of that loan to buy gain in period 2.
a) Based on this information, draw a diagram that outlines Marco's choices. Is he
definitely better off once the opportunity to lend is available to him?
b) Relative to his initial equilibrium point, does he unambiguously consume
more in both periods once he can lend out the excess he does not consume in
period 1?
c) Now assume that Marco can sell any excess grain he doesn't consume in
period 1 and invest the money he gets in a new type of risky activity.…
Chapter 8 Solutions
ECONOMICS W/CONNECT+20 >C<
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- Rodrigo is taking a year between high school and college to work and save up. His utility from consumption each year is U(c) = discounts future utility by B. Rodrigo is going to make $I his year of working, and whatever he doesn't consume from that income will a savings account which will earn return r before he consumes next year. He has to pay for school expenses E in year two, before he consumes (but after return has been realized). 1-o and he go intoarrow_forwardSuppose you bought a condo for $100,000 financing it with a $20,000 down payment of your own funds and an $80,000 mortgage loan from a bank. Now, instead of (a) or (b), suppose the value of the condo fell from $100,000 to $70,000. Assuming you paid $100,000, financing it with $20,000 of your own money and $80,000 with a mortgage loan, and ignoring interest and other costs, calculate your rate of return on your asset (ROA) and your rate of return on equity (ROE). What is the value of your equity stake in the condo after the price fall?arrow_forward2arrow_forward
- You take $100 from your bank and spend all of it at A's store. A spends 90% of the 100$ at B's store. B spends 90% of that value (about $81, if you are curious) at C's store. C spends 90% of that value (about $72s if your are curious at D's store. Who spends 90% of that at.....so eventually this spending will come to an end. At the end of all this, how much spending happened? (If you try to solve this by adding up all the spending you are in for a long evening)arrow_forwardHelena earns $2000 this year and will earn $1500 the next year. The interest rate between each year is 10%. She wants to consume the same quantity each year. She wants to have spent all her money by the end of year 2. Warning: each question does build on each other How much would she save? How much would she consume? If she wins the lottery during the first year, raising her earnings to $10000 this year, how much would she save, how much would she consume? If she now wants to consume twice as much in year 1 as she does in year 2, how much would she save, how much would she consume? If she now has no preferences about her consumption, but she wants to save $5000 in year 1 (to buy a new car in year 2), how much would she consume in year 1 and year2?arrow_forwardJoanne has just completed high school and is trying to determine whether to go to communtiy college for two years or go directly to work. Her objective is to maximize the savings she will have in the bank five years from now. If she goes directly to work, she will earn $18,500 per year for each of the next five years. If she goes to community college, for each of the next two years she will earn nothing—indeed, she will have to borrow $6,000 each year to cover tuition and books. This loan must be repaid in full three years after graduation. If she graduates from community college, in each of the subsequent three years, her wages will be $35,000 per year. Joanne’s total living expenses and taxes, excluding tuition and books, equal $15,000 per year. Joanne should go to (Click to select) work junior college , since the total value of Joanne's savings would be $__ if she goes directly to work and $__ if she goes to community college.arrow_forward
- In many cities, discount clubs are popular. For a fixed annual fee (paid in advance) one can purchase goods at 90% of their listed price (in other words, 10% off the list price); otherwise, one pays the list price. Suppose that the annual fee is $300 and the interest rate on your savings account is 5%. Finally, assume discount club's list prices are the same as any other store, and you plan to spend $4000 over the coming year at this store. (Hint: the interest represents an opportunity cost of purchasing a membership). benefit not buying is a membership I dollars and the cost of not buying The of a membership is dollars. Please record your answer without a dollar sign or a comma.arrow_forwardSuppose 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. Answer Keypad Keyboard Shortcuts timesarrow_forwardThe Fly-by-Night finance company advertises a "bargain 6% plan" for financing the purchase of automobiles. To the amount of the loan being financed, 6% is added for each year money is owed. This total is then divided by the number of months over which the payments are to be made, and the result is the amount of the monthly payments. For example, a woman purchases a $10,000 automobile under this plan and makes an initial cash payment of $2,500. She wishes to pay the $7,500 balance in 24 monthly payments: Find the IRR and Effective Annual Interest rate. Purchase price -Initial payment = Balance due, (Po) +6% finance charge = 0.06 × 2 years × $7,500 = Total to be paid .. Monthly payments (A) = $8,400/24 = $10,000 2,500 7,500 900 8,400 $350arrow_forward
- 9. Kathy buys a television set from a merchant who ask P1,250 at the end of 60 days (cash in 60 days). Kathy wishes to pay immediately and the merchant offers to compute the cash price on the assumption that money is worth 8% simple interest. What is the cash price today? 10. Find the amount due at the end of 15 months whose present value is P2,000 at 5% simple discount.arrow_forwardSuppose a person has a total credit card debt of $1,380 that has a 15 % yearly interest rate. This person also has a savings account with $3,000 that pays 3 % 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. Answer 2 Pan E Keypad Keyboard Shortcuts timesarrow_forwardAntonio is a researcher who teaches thermodynamics at a university where he earns an annual salary of $160,000. He intends to take the next year off to focus on writing a new undergraduate physics textbook, so he will not earn any income next year. He is currently deciding how much of this year's salary he should save for next year. Assume that there are no tax implications associated with the decision, and ignore what happens after next year. Therefore, next year Antonio will consume whatever he saves this year plus interest, and he is not concerned with the future beyond next year. The following graph shows Antonio's preferences for consumption this year and next year. Suppose initially Antonio cannot earn interest on the money he saves. Use the green line (triangle symbol) to plot Antonio's budget constraint (BC₁) on the following graph. Then use the black point (plus symbol) to show his optimum consumption bundle. Note: Dashed drop lines will automatically extend to both axes.…arrow_forward
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