# Fundamentals of Economics

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Fundamentals of Economics
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 Q Total Benefits
B(Q) Total Cost C(Q) Net Benefits N(Q) Marginal Benefit
MB(Q) Marginal Cost MC(Q) Marginal Net Benefits
MNB(Q)
100 1200 950 250 210 40 170
101 1400 1000 400 200 50 150
102 1590 1060 530 190 60 130
103 1770 1130 640 180 70 110
104 1940 1210 730 170 80 90
105 2100 1300 800 160 90 70
106 2250 1400 850 150 100 50
107 2390 1510 880 140 110 30
108 2520 1630 890 130 120 10
109 2640 1760 880 120 130 -10
110 2750 1900 850 110 140 -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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