Economics Homework Eleven Answers - Student Eighteen

Michelle F

1\. If you were to loan someone money, why would you want him to pay you something extra (interest) when he pays back the loan? Give at least one reason.

Loaning someone money is a risk. Even when a bank loans money there are risks involved. There is no guarantee that the recipient of the loan will have the money to pay you back once the term of the loan has expired. The person may have gone bankrupt, or used the money in risky investments, or simply squandered it all. You would want compensation to make up for the risks you took in lending the money in the first place, and for the lost opportunity cost.

Excellent, may use as a model.

2\. Suppose I loaned you $1000 today, and interest rates are 5% per year (compounded annually), and you repaid the loan plus interest in 2 years, then what is the total you would pay to satisfy this debt?

I would have to pay $1102.5

Correct!

3\. Review: is the cost of the bus for a trip to D.C. a "fixed cost" or a "variable cost"? Explain, assuming for the purpose of this question that one and only one bus can be used (in reality, we may have several buses).

A fixed cost. For anyone to be able to go there must be at least one bus. The price for the bus isn’t going to be higher if the bus is full, or lower if it is nearly empty.

Superb.

5\. Suppose I will pay you $1000 in two years, and the interest rate is 10% per year, compounded annually. How much should you pay me today to receive $1000 in two years? Show your work.

You could divide the $1000 by the interest, (1.1), twice, or you could just write it as: 1000/1.12 It is much simpler that way, especially when you are calculating interest for more than two years at a time.

And the final answer is ....? Your first methodology is correct, so I'll give you full credit, but note that 1000/1.12 introduces a rounding error and does not give an accurate final answer.

6\. Pick another question from the midterm exam that you answered incorrectly, and explain the correct answer.

32 on the girls exam: A firm should shut down in the short term when ____, and it should shut down in the long term when _____. The correct answer was, short term-when P<AVC and in the long term when P<ATC. So if the average variable cost is exceeding the revenue, the firm is losing money and should quit while they still can. In the long term the firm should shut down when the revenue is not paying off the fixed costs, because then, while the firm is making short term profits, in the long term they will have lost money.

Excellent!

Honors 7\. Explain what “economic rent” is in your own words, using your own example.

Economic rent is a return greater than the normal profit/return for that particular good or service. It is the additional revenue you get for having a good/service that is in high demand, without having put any more money into your product, simply because your product is unique in some way. For example, there are Pop Tarts, and then there are the store brands. They are fairly good substitutes, but the prices are much higher for Pop Tarts. They receive economic rent on that good simply because they are better known.

Superb, with a terrific example that illustrates the power of a well-known brand. Of course, Pop Tarts had to work hard and spend much money to obtain such a well-known brand.

8\. An agreement by different firms with each other to reduce output is illegal. Why should that be illegal?

Because then all of the companies get the benefits of a monopoly without technically being a monopoly. It undermines the usefulness of the free market.

Right.

9\. What is your favorite concept in Economics, and why?

Gresham’s Law. I think it is very accurate, and not just in economics. So often people hoard what is good, and freely give stuff that is worthless.

Excellent.

Superb work again! Note my comment to your answer number 5. 80/80. Congratulations!--Andy Schlafly 22:14, 5 December 2009 (EST)