Fundamentals of Economics

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Chapter 1 (2 & 6 p. 27)

2. What is the maximum amount you would pay for an asset that generates an income of $150,000 at the end of each of five years if the opportunity cost of using funds is 9 percent?

To find the maximum amount, we must determine the Present Value (PV) of the $150,000 over the 5 years.

PV=(150000/1.09^1)+(150000/1.09^2)+(150000/1.09^3)+(150000/1.09^4)+ (150000/1.09^5) = $583,447.69

So, if costs exceeded $583,447.69, then the asset would not be worth the price.

6. Complete the following table and answer the accompanying questions.

a.At what level of the control variable are net benefits maximized? 108 b.What is the relation between marginal benefit and marginal cost at this level of the control variable? At this control level, the marginal cost is smaller than the marginal benefit. There is still a marginal net benefit of 10.

Control variable QTotal Benefits
B(Q)Total Cost C(Q)Net Benefits N(Q)Marginal Benefit
MB(Q)Marginal Cost MC(Q)Marginal Net Benefits
MNB(Q)
100120095025021040170
1011400100040020050150
1021590106053019060130
1031770113064018070110
104194012107301708090
105210013008001609070
1062250140085015010050
1072390151088014011030
1082520163089013012010
10926401760880120130-10
11027501900850110140-30

Chapter 2 (1,4,17 pp. 66-70)
1.The The X-Corporation produces a good (called X) that is a normal good. It’s competitor, Y-Corp., makes a substitute good that it markets under the name “Y,” Good Y is an inferior good.

a.How will the demand for good X change if consumer incomes increase?

Since X is a normal good, an increase in income will lead to an increase in the demand for good X.

b.How will the demand for good Y change if consumer incomes decrease?

Since Y is an inferior good, a decrease in income will lead to an increase in the demand for good Y.

c.How will the demand for good X change if the...
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