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Chapter 14: Q2. (page 570)

You are offered the choice of two payment streams: (a) \(150 paid one year from now and \)150 paid two years from now; (b) \(130 paid one year from now and \)160 paid two years from now. Which payment stream would you prefer if the interest rate is 5 percent? If it is 15 percent?

Short Answer

Expert verified

When the interest rate is 5%, then stream (a) will be preferred, and when the interest rate is 15%, then also stream (a) will be preferred.

Step by step solution

01

Step 1. Explanation for present value when r = 5%

A rational investor will prefer a higher present value of the payment stream as it gives greater worth today.

The present value of the payment stream (a) is calculated below:

The present value for stream (a) is higher than stream (b); thus, stream (a) will be preferred.

02

Step 2. Explanation for present value when r = 15%

The present value of the payment stream (a) is calculated below:

The present value for stream (a) is higher than stream (b); thus, stream (a) will be preferred.

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Most popular questions from this chapter

Suppose that a firm’s production function is given by Q = 12L – L2, for L = 0 to 6, where L is labor input per day and Q is output per day. Derive and draw the firm’s demand for labor curve if the firm’s output sells for \(10 in a competitive market. How many workers will the firm hire when the wage rate is \)30 per day? $60 per day? (Hint: The marginal product of labor is 12 - 2L.)

A firm uses a single input, labor, to produce output q according to the production function q = 8√L. The commodity sells for \(150 per unit and the wage rate is \)75 per hour.

  1. Find the profit-maximizing quantity of L.
  2. Find the profit-maximizing quantity of q.
  3. What is the maximum profit?
  4. Suppose now that the firm is taxed \(30 per unit of output and that the wage rate is subsidized at a rate of \)15 per hour. Assume that the firm is a price taker, so the price of the product remains at $150. Find the new profit-maximizing levels of L, q, and profit.
  5. Now suppose that the firm is required to pay a20-percent tax on its profits. Find the new profit-maximizing levels of L, q, and profit.

Question: The demands for the factors of production listed below have increased. What can you conclude about changes in the demands for the related consumer goods? If demands for the consumer goods remain unchanged, what other explanation is there for an increase in derived demands for these items?

  1. Computer memory chips

  2. Jet fuel for passenger planes

  3. Paper used for newsprint

  4. Aluminum used for beverage cans

The only legal employer of military soldiers in the United States is the federal government. If the government uses its knowledge of its monopsonistic position, what criteria will it employ when determining how many soldiers to recruit? What happens if a mandatory draft is implemented?

The demands for the factors of production listed below have increased. What can you conclude about changes in the demands for the related consumer goods? If demands for the consumer goods remain unchanged, what other explanation is there for an increase in derived demands for these items?

  1. Computer memory chips

  2. Jet fuel for passenger planes

  3. Paper used for newsprint

  4. Aluminum used for beverage cans
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