Fundamentals of Economics Essay

841 Words Feb 6th, 2013 4 Pages
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
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d. Is good Y a lower-quality product than good X? Explain.

No. The term inferior good does not mean inferior quality, it just means that income and consumption are inversely related.

4. The demand for good X is given by

Qd x = 1,200 – ½ Px + ¼ Py, -8Pz + 1/10 M (We are looking at demand for good X)

If the sign are the same, they are complements. If they are the different, they are substitutes.

When the relationship moves together it’s a normal good. If they are opposites, they good is inferior.

Research shows that the prices of related goods are given by Py = $5,900 and Pz = $90, while the average income of individuals consuming this product is M = $55,000.

a. Indicate whether goods Y and Z are substitutes or complements for good X.

Good Y is a substitute for X, while good Z is a complement for X.

b. Is X an inferior or a normal good? X is a normal good.
c. How many units of good X will be purchased when Px = $4,910?

1,200-$4910/2 + $5900/4 – 8 x $90 + $55,000/10 = 5000
d. Determine the demand function and inverse demand function for good X. Graph the demand curve for good X.

The demand function for good X is 1200 – Px/2 + $5900/4 – 8 x $90 + $55,000/10, which is 7,455 – 0.5Px. The inverse is Px = 14,910 – 2 Qd x

Price of X

$14,910

$11,928

$8,946

$5,964

$2,982

0$ 1000 2000 3000 4000 5000 6000 7000 8000 Quantity of x

17. GR Dry

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